Expert: Allen - 10/30/2011

Question
Hello

We sponsor both a 401(k) and SEP-IRA. Our pay package includes a percentage of salary for retirement and this benefit has three tiers based upon longevity. We allow the employee to chose either retirement vehicle or allocate any amount to be divided between the two vehicles.

I am reviewing the rules for SEP and am wondering about the uniform SEP contribution rule. Is compliance based upon a uniform pay package or is compliance based upon a uniform amount being sent to each SEP-IRA account? Thanks.

Answer
The contribution by the company to the SEP for each eligible employee must be the same percentage of pay. Your plan design is well intentioned. Unfortunately, I do not believe your current arrangement is acceptable. If the plan or plans were audited by the IRS, they would probably be disqualified.

If you want to contribute different percentages of pay to different groups of employees, you probably should terminate the SEP and amend the 401k plan into what is known as a cross tested profit sharing plan. Under a cross tested plan you put employees into groups and then determine what percent of pay you want to contribute for each group. The plan must be "tested" using a test established by the IRS to show that it does not "discriminate" in favor of highly paid employees.

I suggest contacting an individual located near your company who is knowledgeable about profit sharing plan design options.