Facts
Our firm sponsors a 401(k) plan that includes a 3% of pay safe harbor contribution. The plan also includes a profit sharing provision, but the only company contribution we usually make is the safe harbor.
Question
One of our partners has asked whether he can set up a personal SEP IRA so that he can make a contribution for himself equal to the difference between the overall maximum contribution limit of $54,000 (2017 limit, indexed for inflation) and what he receives in our firm’s 401(k) plan.
Is that allowable?
Answer
Even though a SEP is funded using personal IRA accounts, it is still an employer-sponsored plan. As a result, only employers are permitted to make SEP contributions for their employees, and individuals are not permitted to create SEPs for themselves. In order for the firm to create a SEP (and make a contribution) for this one partner, it would generally have to do so for its other employees as well. Since the firm has already decided not to make a profit sharing contribution, this is probably a non-starter.
If the partner in question receives some form of self-employment compensation from another source besides the firm, he could incorporate or establish a sole proprietorship and then create a SEP with respect to that business. However, he would only be able to consider the compensation he receives from that entity to determine his maximum SEP contribution each year (capped at 25% of pay).
Another wrinkle to consider is whether or not the partner’s separate business entity would have to be aggregated with your firm for plan purposes. If there is enough common ownership/partnership interest, the two entities might form a controlled group. Also, if the partner’s company provides services to or in conjunction with your firm, the entities might form an affiliated service group. In either event, the businesses would have to be treated as if they are a single employer for purposes of the retirement benefits, which would again trigger the requirement to make a SEP contribution for all of the firm’s employees.
For more information on 401(k) plans, SEPs and SIMPLEs, please visit our Knowledge Center here.
