Category: Compensation & Employee Benefits;
Individuals Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com The taxpayer is a statutory employee of an insurance company meaning that the taxpayer is an employee with respect to the insurance company for FICA purposes and self-employed for other tax purposes. See IRC Section 3121(d)(3). The insurance company maintains a 401(k) plan which is entirely funded by the employee (i.e., no matching). Taxpayer wishes to establish a SEP for herself and her employees. While this conclusion is not free from doubt, I can find no specific restriction on establishing a SEP in this case. This is obviously a rather peculiar situation, and it seems to be the case that no specific rules exist for handling such circumstances. It seems to me that the taxpayer is clearly self-employed for all purposes except FICA. Absent something that tells us otherwise, it appears that the taxpayer is fully eligible to establish as SEP. I suppose the IRS could attack the taxpayer's SEP by arguing that the insurance company, by virtue of having established a 401(k) plan, is the only employer eligible to establish a qualified retirement plan under these circumstances. This is simply a risk the taxpayer should be made aware of. Now we approach the issue of how much can be contributed. In essence, how does the 401(k) deferral affect the maximum amount eligible for the SEP contribution? Again, this is not clear. For purposes of the limitations under Section 415(c), the 401(k) deferral must be taken into account. In essence, compensation for purposes of the Section 415(c) limitation is reduced by the deferral amount. Normally, the SEP limitation for a self-employed person is 13.043% of the net Schedule C amount. It is not clear in this case whether the limit should be A) 13.043% of the net Schedule C amount; or B) 13.043% of the net Schedule C amount reduced by the 401(k) deferral. Given the treatment under 415(c), I would advocate basing the SEP contribution on the latter alternative (i.e., the 13.043% of the net Schedule C amount reduced by the 401(k) deferral). |
