Expert: Allen - 5/6/2007

Question
We are four members who have equal shares in an L.L.C. service company. We want to expand by hiring an employee. Can we continue to individually fund our SEP IRA's and create a separate benefits plan for this new employee, and future employees? How do we do this?  

Answer
A SEP MUST include all employees of the business. For this purpose members are considered employees. A separate account is established at a financial institution for each eligible employee. In addition, the contribution for each participant must be the same percentage of his/her pay. (Pay for a regular employee is gross amount received and "pay" for a member is K-1 income reduced by 50% of the self employment tax paid on that income and also reduced by his/her contribution to the SEP). There can be a waiting period so you may not have to include employees immediately. These are black and white rules. Unfortunately some financial advisors are not fully aware of the rules.

If you are looking for a more flexible program you would have to consider a profit sharing plan or a combination 401(k)/profit sharing plan. However, this generally involves fees to prepare forms and provide other administrative services.

If you are looking for help, you may be able to receive good advice and administrative assistance from one of the large mutual fund companies. I believe the best place to go is one of the large companies with lots of no load funds - Fidelity, Vanguard or T Rowe Price. If you need more hand holding you should work with a competent individual who is knowledgeable about the rules and can help design a program around your objectives. If you are in the Washington DC area, I may be able to help you. If you are in another part of the country, I may be able to give you the name of someone who can help you.