S Corp SEP IRA Contribution % for Employee
Can you please advise what % of qualifying income must be used to calculate an employee SEP IRA 2013 contribution for the following scenario?
S Corporation owned 100% by an attorney. The attorney and his paralegal are the only 2 employees of the S Corp. Paralegal is over age 21, earns more than $500, and has worked for the S corp for the last 3 years. Paralegal’s 2013 W-2 wages will be $75,000. The Attorney’s 2013 W-2 wages will be $500,000, more than the max compenation cap of $255,000. The attorney will contribute the max $51,000 to his SEP IRA for 2013 ($255,000 * 20% = $51,000). As I understand it, the S corp must contribute an equal percentage to the paralegal’s SEP IRA.
Question: Is the S corp. required to contribute 20% of the paralegal’s W-2 wages? ($75,000 * 20% =$15,000)
Or is the S corp. required to contribute 25% (the max %) of the paralegal’s W-2 wages? ($75,000 * 25% = $18,750)
Permalink Submitted by Alan - IRA critic on Thu, 2013-01-10 22:44
The latter – 25% = $18,750.
Permalink Submitted by Martin Helmer on Fri, 2013-01-11 15:46
In this case, the S corp has the discretion to choose any percentage between 20 and 25. The decision should be formalized in a board resolution, especially if the paralegal will be getting a smaller percentage than the owner.
Permalink Submitted by David Winkler on Tue, 2013-01-15 20:22
I posted the question to the IRS as well. The IRS agent indicated that the percentage must be uniform for both employees as written in the plan document. He said that in this example, the paralegal would receive 20%. I appreciate both of your responses.