Discussion:SEP Contribution to employee
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Discussion Forum Index --> Basic Tax Questions --> SEP Contribution to employee
Discussion Forum Index --> Tax Questions --> SEP Contribution to employee
Www.cpa1.biz (talk|edits) said: | 16 March 2009 |
| Almanacers,
A business I am dealing with needs to make a SEP contribution for their S corp for 2008. They are a husband and wife dentistry with some other employees. There is one employee that was hired in December 2005. I am reading the requirement for having to contribute to a SEP and it says that the employer must contribute to employee who has worked three of the preceding 5 years. Well, in December 2008, this employee will meet three years. Does this mean that if the employer makes SEP contributions, this one employee is going to have to be part of this contribution? Another part to this is let's say they dont want to contribute for 2008 because they have to contribute for this employee, can they contribute to a traditional IRA for both husband and wife? I know that if they are part of a retirement plan, they cannot contribute to a trad IRA if they pass the AGI thresholds but what if they dont contribute to the SEP for 2008. In effect, they would not be part of a retirement plan. Please advise. Thanks, Bj | |
IDrinkYour Milkshake (talk|edits) said: | 16 March 2009 |
| Do a Section 79 plan (form a C-Corp). They'll love you next year. | |
| 16 March 2009 | |
| Years of service in a SEP aren't calculated like years of service in a 401 plan. If the employee earned $450 in 2005, that's 1 year of service right there. If $450 was not attained, then the employee is excluded from the plan because the best he/she could do would be achieving the third year of service in 2008. The requirement is for 3 PRIOR years of service. I'm assuming it's a calendar year plan; if not it might not make a difference.
The husband and wife might well be 'active participants' in an employer plan for 2008. This would mean their traditional IRA deductibility would be subject to the AGI limitations. They could always contribute on a nondeductible basis. Most of the rules for determining 'active participation' are in Notice 87-16. You might say the SEP (defined contribution plan) determination is on a cash basis. So assuming there was a SEP contribution in 2008 in regard to 2007, such a situation typically means active participation is deemed to be for 2008. | |
| 16 March 2009 | |
| Be sure the written SEP plan for the S Corp does in fact require the maximum 3 years of service. | |
