Category: Compensation & Employee Benefits; Individuals
Subject: SEP
Title: SEP's for Older Taxpayers
IRC Sections: 408(k), 219
Filename: 1212.html
Date Produced: 03/95

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Issue
Is it possible for a self-employed taxpayer, aged 72, to establish an SEP?

Answer
It is possible to establish an SEP for this taxpayer.

Discussion
The basic qualifications for an SEP are set forth in Section 408(k) which provides no maximum participant (or sponsor) age limit.

An SEP is basically a special form of IRA in which the employer, or as in this case the self-employed person, sets up an IRA for each employee. Because the IRA and SEP rules overlap to a large degree, an SEP is subject to many of the same rules as an IRA. Section 219 provides a number of rules regarding deductions of IRA contributions: e.g., the familiar $2,000 limitation, the active participant rules, and the spousal IRA rules are contained in Section 219. Section 219(d)(1) prohibits deductible IRA contributions for participants in excess of age 70-1/2; however, Section 219(b)(2) provides that all the rules of Section 219 are specifically inapplicable to SEP's.

Proposed regulations issued in 1984 specifically provide that SEP contributions can be made for participants in excess of 70-1/2 years of age. Proposed Regulation 1.219-3(b).

It seems to me that in the absence of language restricting SEP eligibility on account of advanced age and given the positive language found in Section 219 and its related proposed regulation, the taxpayer in question can establish an SEP arrangement.

Although the issue was not raised, it may be extremely important to your decision making process to note that the IRA rules requiring that distributions begin no later than the year in which a taxpayer attains age 70-1/2 apply equally to SEP's. In other words, even though it is possible to establish and contribute to a SEP, it is also necessary to currently distribute monies from the SEP based on the taxpayer's life expectancy. This may substantially reduce the attractiveness of establishing the SEP in the first instance. I caution you to carefully look into this. I assume that the taxpayer wants an SEP for 1994. I assume further that the taxpayer would like to make a contribution before April 15, 1995 to count as a deduction for 1994. If so, the taxpayer could conceivably have had an obligation to make a distribution before the end of 1994.

Query: Can a taxpayer can make distributions post-year end and have them count for purposes of the prior year?

Query: Does Prop. Regs. Section 1.401(a)(9)-1, Q & A, B-2 apply and provide relief in this situation?

Query: If Prop. Regs. Section 1.401(a)(9)-1, Q & A, B-2 does apply and provide relief, would two contributions be required in calendar 1995, one attributable to 1994 and the other for the 1995 year itself?

In any event, be aware that failure to make the required distribution is severely penalized. For more information, see Prop. Regs. Section 1.401(a)(9)-1 and Section 4974. Of course, should you need further assistance, I would be happy to provide it.