Multiple Plans
Situation – A doctor is a partner in an LLC. The LLC has a 401k for employees & partners, and makes a 3% safe harbor contribution. One of the docs/partners also has Schedule C consulting income. She established a SEP IRA years ago before joining the partnership providing the 401k. Can she contribute additional amounts to the SEP above elective deferral and the 3% ps from the LLC that went into the 401k? If so, is it based solely upon 25% of the Schedule C, or can it include all income from all sources? (LLC income is treated as self-employment income.) Do controlled group rules apply to SEP contributions?
Permalink Submitted by Peter Lingane on Sat, 2011-03-19 22:45
An individual who is employed by two distinct business, each of which has a retirement plan, may participate in both plans. Your physician’s contribution to the SEP plan is based on the compensation on her Sch C while her contribution to the 401k plan is based on her compensation from the LLC.
There are three limits to consider. First, only the first $250K or so of Sch. C or of LLC compensation is considered. Contributions to the two plans could be based on a total compensation of about $500K assuming at least $250K from each business.
Second, the elective deferral (SEP plus 401k) is limited to about $16,500 assuming the participant is under age fifty at the end of year. If the SEP does not allow elective deferrals – most don’t – the full amount can be deferred within the 401k plan assuming enough compensation and whatever other rules the 401k plan imposes. See Publication 560, p. 8.
The allowed deferral to either a SEP or 401k plan might be less than the limit if the physician is a “highly compensated employee” and if the non highly compensated do not defer very much. Antidiscrimination rules are complex and you should seek advice from an actuary if you think that they might apply.
Third, the maximum contribution to the SEP (employee plus employer) is about $50K and the maximum contribution to the 401k is also about $50K. These limits are increased by any catch-up contributions if the physician is fifty or older. It may be possible to contribute about $100K plus a catchup contribution.
The limits for 2010 and 2011 are published in IRS Publication 560 (2010 version), Table 1.