Category: Compensation & Employee Benefits; Deductions & Credits
Subject: SEP
Title: Timing of Deductions when SEP Year Differs from Employer's
IRC Sections: 404(h)(1)(A)
Filename: 1351.html
Date Produced: 12/94

Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com

Per our telephone conversation you want to know the coordination of employer deductions to a SEP if the SEP has a different tax year from the employer-sponsor. You also want to know how to establish a SEP if Form 5305-SEP is inappropriate. Following are my comments on those matters.

Timing of Deductions
If the SEP and the employer sponsor have different tax years, the employer's deduction for a given plan year is available in the tax year which begins within the plan year. I agree with your assessment that this provision has the effect of deferring the employer's tax deduction. See IRC Section 404(h)(1)(A) and the attached excerpt from BNA 355-4.

Plan Documents
It is clear that Form 5305-SEP is for calendar year plans ONLY. Apparently, prior to the 1986 Tax Act, SEP's were required to adopt the calendar year. Even though that restriction has been relaxed, no simplified method exists for establishing a non-calendar year SEP.

The author of BNA Portfolio 355-4 offers two alternatives for employers who cannot or do not wish to use Form 5305: 1) use a Master/Prototype Plan, or 2) use a plan custom designed for the employer in question. The practical solution seems to be the Master/Prototype Plan. According to the author, many banks, brokerage houses, insurance companies, etc. have Master/Prototype plans which have already received IRS approval. These firms allow their clients to establish SEP's using the pre-approved plans thus avoiding the expense and uncertainty of custom designing a plan for a single employer. See the attached excerpt from BNA 355-4.