SEP Eligibility
A client is a W-2 employee at a commercial real estate firm making $200,000 per year and is participating in the company 401k plan (she maxed out the 401k and there is no matching). The company just paid her a year end bonus of $185,000, but they paid it to her as an independent contractor and thus will be issuing her a 1099 and she will now have to file a Schedule C for the $185,000. For 2007, she will receive W-2 income and 1099 income from the same employer.
Is she permitted to establish a SEP IRA since she will now have to file a Schedule C for this 1099 income? If she can, can she contribute the full 20% of the $185,000?
Permalink Submitted by Martin Helmer on Thu, 2007-12-27 19:30
Assuming there’s no problem with the w-2 and 1099 combination that might appear to some to be compensation for identical work, your answers are primarily based on whether or not there’s a controlled group or affiliated service group relationship between the two businesses. If there’s no such relationship, then the client’s SEP gets a brand new section 415(c) limit, for 2007 being the lesser of $45,000 or 100% of pay. Pay is self employment net income (after Schedule C expenses) minus half the self employment tax, with the remainder being multiplied by 20%.
If there IS a controlled group or affiliated service group relationship, then there’s not a new 415(c) limit, and the 2 plans must be aggregated for coverage and nondiscrimination purposes. Furthermore, if you’re using Form 5305-Sep as the SEP plan document, it does not allow a second plan to coexist with it.
The IRS has a worksheet and explanation for the affiliated group concept used for retirement plan purposes. You can google ‘alert guidelines’ and look at #10.
If there are ‘nonhighly’ compensated employees at the real estate company, it would seem your client would not be able to max out at the $15,500 individual elective deferral limit unless this is some type of ‘safe harbor’ 401k plan, in which even highly compensated employees will normally get 3-4% of pay in the form of employer matching.
It might be too late to think about a defined benefit plan for this year; it must be signed before January 1, 2008. You might want to look into this type of plan going forward, especially if the client will be making good money for a while and wants large contributions and can live with the obligation of the ‘minimum funding’ requirement.
Permalink Submitted by Jonathan Sard on Thu, 2007-12-27 20:45
IF there is an affiliated service group relationship, can the person still set up the SEP and make up to a $29,500 contribution (assuming she maxed out the k plan to $15,500 and her 1099 earnings support the full contribution)?
Permalink Submitted by Martin Helmer on Thu, 2007-12-27 21:59
That won’t work. If there’s an affiliated service group, all eligible employees of the real estate company must be covered by the SEP plan. Even if all of them happened to be highly compensated, the SEP rules mandate coverage of everyone eligible, whether they want that or not. But a qualified 401 plan, such as a profit sharing plan, could be written so as to exclude everyone else, if they’re all highly compensated. It’s one employer, for purposes of qualified 401 plans and for the SEP.