multiple retirement plans

[natiro]

In TTB 13-4 it says, regarding SEPs, that "The contribution limits for defined contribution plans also apply to SEP-IRAs. The total contributed to all qualified plans is combined with applying the maximum contribution limits. Example: In 2005, Rick's employer contributed 39,000 to his profit sharing plan based on 156,000 in W2 wages. Rick also earned 60,000 as a self employed janitor. His SEP deduction for his self employment is limited to 3,000."

Is this correct? In researching this elsewhere, my take on it is that the limit is at the employer level unless there is common control. In this case, I don't see that there is common control, unless Rick has controlling ownership of the corporation. In this example, can't Rick contribute 12,000 to his SEP, assuming there is no common control?

I'm asking because I have a client in this situation and I believe he can maximize his self employment SEP in spite of the fact that he participates in a defined contribution plan from his employer.

Any light you can she would be appreciated. Thanks.

[OldJack]

I agree

I agree with your conclusion that he can make a full/max SEP-IRA on SE income even though he received a contribution from a non-related employer, however, I have not varified your numbers.

[Bees Knees]

Wrong

IRS Pub 560 (for 2004 tax returns) says on page 6:

"More than one plan. If you contribute to a
defined contribution plan (defined in chapter 4),
annual additions to an account are limited to the
lesser of $41,000 or 100% of the participant’s
compensation. When you figure this limit, you
must add your contributions to all defined contribution
plans. Because a SEP is considered a
defined contribution plan for this limit, your contributions
to a SEP must be added to your contributions
to other defined contribution plans."

This is based on Code Section 415(c)(1) which is a per participant limitation, not a per employer limitation. No one participant can ever have more than $42,000 (in 2005) contributed to a qualified defined contribution plan, no matter how many jobs the person has.

[OldJack]

This is based on Code Section 415(c)(1) which is a per participant limitation, not a per employer limitation. No one participant can ever have more than $42,000 (in 2005) contributed to a qualified defined contribution plan, no matter how many jobs the person has.

I disagree. We are talking about the employer contributions rather than the employee. It is per participant within the plan and related plans. If the employee works for 2 unrelated corporations, each corporation may make the max contribution for their employees which would include your client as an employee of both. §415(c)(1) clearly is with regards to the participant's account within the employers plan trust.

(c) Limitation for defined contribution plans
(1) In general
Contributions and other additions with respect to a participant
exceed the limitation of this subsection if, when expressed as an
annual addition (within the meaning of paragraph (2)) to the
participant's account, such annual addition is greater than the
lesser of -
(A) $40,000, or
(B) 100 percent of the participant's compensation.
(2) Annual addition
For purposes of paragraph (1), the term "annual addition" means
the sum of any year of -
(A) employer contributions,
(B) the employee contributions, and
(C) forfeitures.

[Matt Sova]

Sorry Jack

Bees is correct. The limit is the overall limit between all employers and self employment. If someone works at 2 different jobs and Job A they earned 200k and put 14k into their 401k and their employer does a 25% match then they will reach their limit for 2005 at that job. They cannot contribute $1 to their 401k at Job B until 2006.

Matt

[Bees Knees]

I disagree. We are talking about the employer contributions rather than the employee. It is per participant within the plan and related plans. If the employee works for 2 unrelated corporations, each corporation may make the max contribution for their employees which would include your client as an employee of both. §415(c)(1) clearly is with regards to the participant's account within the employers plan trust.

Then you disagree with IRS Pub 560.

[natiro]

Agree and disagree

I agree with Matt Sova about combining plans for the deferral limit. But I'm not talking about the deferral limit. I'm talking about the limit on employer contributions to a defined contribution plan. I agree with Old Jack. . .at least I agree in that my interpretation of the code is the same.

I've read Pub 560, page 6 and believe that when the IRS talks about multiple plans, they're talking about multiple plans by one employer.

Also, when I read IRC 415(c)(1) I interpret participant to mean a participant in this particular plan.

Of course, I often research something to death and still miss the obvious, so I admit I could be way off base.

But if you think about it. . .

Let's say an employee (Joe) works for 2 unrelated corps and each has a SEP plan. The contribution to the employee's SEP is calculated at the employer level and must meet certain requirements. Let's say that each corp has a shareholder employee and one employee (Joe.) Corp A maximizes the contribution for the shareholder and Joe at 25%of salary, which for Joe means a 40,000 contribution. If Corp B can only contribute 2,000 for Joe, then wouldn't the shareholder also be limited to contributing for himself, the same % Joe is getting? I just don't believe this is how it works and I don't see why it would be different if we are talking about being an employee participant and a self employed participant.

Any thoughts?

[OldJack]

Sorry Matt

Sorry Matt but that is not correct. Also, I am not referring to "employee" contributions although I don't see that would make a difference. It is not the employer's requirement to investigate if all their employees work for some other employer and thereby limit employer contributions for participants. In fact limiting contributions on other than the employer's own employee status would be possible discrimination of the plan. Code §415 is regarding an "employer" plan and its requirements and limitations, it is not regarding the individual and his 1040 tax. There is no requirement that an employee make his employers aware that he is a participant in some other plan. The Pub is referring to situations where the one employer has multi-plans or multi-corporations.

[JON]

Old Jack

Go...... I agree. 15 years ago a Professor at the U of Minnesota also had a full time job out east at a college, I think the U of North Carolina. He qualified for the employer's retirement contributions at both schools. He was fired by both. He went to court and was reinstated at the U of Minnesota. Something called TENURE-defined as a guarantee of of average or less preformance. Army personnel always have their military retirement and the lifers usually are night and daylighting loading plans. As do regular salaried employees serving on boards of directors-load Sch C with retirement contributions...

[OldJack]

Then you disagree with IRS Pub 560.

No Bees... you are misinterpreting the IRS pub. Try looking at the code.

[Bees Knees]

No Bees... you are misinterpreting the IRS pub. Try looking at the code.

Code Section 415(f)(1)(B), "All defined contribution plans...of an employer are to be treated as one defined contribution plan."

Code Section 415(f)(3), "Nothwithstanding paragraph (1) and subsection (g), a multiemployer plan (as defined in section 414(f)) shall not be combined or aggregated..."

Code Section 414(f)(1), "For purposes of this part, the term "multiemployer plan" means a plan - (A) to which more than one employer is required to contribute, (B) which is maintained pursuant to one or more collective bargaining agreements between one or more employee organizations and more than one employer, and (C) which satisifes such other requirements as the Secretary of Labor may prescribe by regulations."

Except for Union Agreements, the code says all plans are treated as one plan for purposes of Section 415. A self employed person making contributions to a SEP, as described in the example in TTB page 13-4 cannot argue that his self employment income is part of a Union Agreement which would meet the multiemployer exception in Code Section 414(f).

[OldJack]

Code Section 415(f)(1)(B), "All defined contribution plans...of an employer are to be treated as one defined contribution plan."

I agree "of an employer" but this is not applicable to two unrelated corporations or two unrelated businesses plans.

Code Section 415(f)(3), "Nothwithstanding paragraph (1) and subsection (g), a multiemployer plan (as defined in section 414(f)) shall not be combined or aggregated..."

Code Section 414(f)(1), "For purposes of this part, the term "multiemployer plan" means a plan - (A) to which more than one employer is required to contribute, (B) which is maintained pursuant to one or more collective bargaining agreements between one or more employee organizations and more than one employer, and (C) which satisifes such other requirements as the Secretary of Labor may prescribe by regulations."

This code section is defining a plan with related employers and not plans of separate unrelated employers. All code you cite has to do with related businesses or related plans such as a trade union plan.

Privacy laws would keep unrelated employers from sharing payroll and employer contribution information even if they knew they had the same employee.

Except for Union Agreements, the code says all plans are treated as one plan for purposes of Section 415. A self employed person making contributions to a SEP, as described in the example in TTB page 13-4 cannot argue that his self employment income is part of a Union Agreement which would meet the multiemployer exception in Code Section 414(f).

Nonsense, we are not talking about Union plans here, the self employed person is not limited by his W2 income (not SE income) where s/he participated in a retirement plan except for a Traditional or Roth-IRA where the code specifically limits the participant as it is the participant that is calculating and making the contribution.

A self-employed individual has a separate business where s/he is being treated as the "employer" for purposes of having a retirement plan for such business. The only difference verses her/him having a corporation with a retirement plan is that the self-employed individuals contribution has to account for the deduction of self-employment tax. The self-employed person (as an employer) may have a plan and make contributions to employees. The self-employed "business" is making the calculation for limitation and not the self-employed participant.

[Bees Knees]

No, we are talking about SEP plans. Can a self employed taxpayer set up a SEP and contribute the max without taking into consideration contributions made on his behalf through his employer's defined contribution plan?

IRS Pub 560 says "When you figure this limit, you must add your contributions to all defined contribution plans. Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans."

The Pub says nothing about the other defined contribution plans only being taken into account if it is through the same employer. It simply makes the point that if you participate in other defined contribution plans, you can't set up a SEP as a self-employed person and exceed the overal contribution limits.

[OldJack]

No, we are talking about SEP plans. Can a self employed taxpayer set up a SEP and contribute the max without taking into consideration contributions made on his behalf through his employer's defined contribution plan?

I take it you have now addressed you opinion "only" to a self-employed person and therefore agree with unrelated employer SEP-IRA plans making max contributions?

Again, unrelated employers do not share employee information or limit their contributions based upon what some other unrelated employers plan has done. If my corporation wants to max a SEP-IRA contributions for all my employees that is my business and my corporation is allowed to deduct the full max contribution regardless of what you do for the same employee that worked in your corporation.

I am not in disagreement with Pub 560. You must look at "who" the pub is talking to. The title of the Pub is "Retirement Plans for Small Business" and not for the small business participant. A self-employed person is an employer with a business plan (it is limited to his SE business income) the same as if he was a corporation with a business plan.

The Pub is for YOU to interpret for YOUR business alone and for me to interpret for MY business alone. Your business and my business (maybe self-employed) are the ones calculating any limitation, not the participants of the plan. If I own a related S-corp with a SEP plan and a self-employed business (Sch-C, Sch-F, etc) then I am limited on contributions as though it was all one business, that is what the Pub is referring to and you are misinterpreting it to mean all other plans that a participant might have received benefits.

The self-employed person may make SEP-IRA contributions for employees of his business, but there is no code or rules that require him to limit his contributions and deduction for the fact that one of the employees may be employed elsewhere and receiving contributions from some other employer. The pub does not address this as there is no such requirement for the self-employed employer to calculate such limitation.

[natiro]

multiple plans

IRS Pub 560 says "When you figure this limit, you must add your contributions to all defined contribution plans. Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans."

I think the key words here though are "your contributions." The employee does not make contributions, the employer does. I still believe this means that if an employer has multiple plans, including a SEP, the employer must aggregate the SEP contribution with contributions of other defined contribution plans.

I have a couple of calls out to associates who practice in this area and will let you know what they say.

Thanks for the many responses. Please continue!