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SEP continuation

Technical topics regarding tax preparation.
#1
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S-Corp TP with 1 employee set up SEP years ago. However, for the past 10 years-ish has been contributing to a DB plan (now closed) so SEP has not been in use at all.

TP had several 1099 contractors. Corp attorney is recommending hiring all the 1099 contractors as employees because of some issues with CA law (which all makes sense so this isn't the issue).

We have no idea where the initial SEP documentation is - set up way before I started. Documentation would show either an instant entrance date all the way up to a 3 year entrance date for SEP. I would "think" instant would have applied since there was only the one shareholder employee for years, but obviously I don'k know. What happens now? Caution on the side or error? Is it ok to start all over again? And if it's ok to start all over again, then can we start the 3 year entry since the one shareholder has been employee forever? Are there exceptions to when contractors get converted to employees, such as their previous contractor time "counts" toward years worked?

Thanks for your help.
 

#2
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I found the answer for anyone wondering and to have this post in the future. Talked to a pension specialist. We can set up a new SEP plan at anytime (had no idea we could do that). So before the new hires come on board, will just elect for the 3 year eligibility entrance date no matter what the old plan said before.
 

#3
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So before the new hires come on board, will just elect for the 3 year eligibility entrance date no matter what the old plan said before.


By this I assume you mean the owner will be immediately eligible, correct?

Any what about all of those contractors…will any of them be immediately eligible under the 3-year rule?
 

#4
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By this I assume you mean the owner will be immediately eligible, correct?

Correct. Since owner has worked at company for ages, she would be automatically eligible under the 3-year rule.

Any what about all of those contractors…will any of them be immediately eligible under the 3-year rule?

Well, that was my original question. According to the pension person I talked to, they would not be eligible. The new plan would be set up before the contractor conversion happened.
 

#5
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Well, that was my original question. According to the pension person I talked to, they would not be eligible. The new plan would be set up before the contractor conversion happened.



(2) Participation requirements.
This paragraph is satisfied with respect to a simplified employee pension for a year only if for such year the employer contributes to the simplified employee pension of each employee who—
(A) has attained age 21,
(B) has performed service for the employer during at least 3 of the immediately preceding 5 years, and


I read 408(k)(2) like this: We have an IC that has worked for the business for 10-years, up through 7/14/19. He is converted to an EE on 7/15/19. Back on 1/1/19, a SEP Plan was instituted (which was prior to the IC becoming an EE).

Has that EE “performed service for the employer during at least 3 of the immediately preceding 5 years?” He has, hasn’t he? I think so, even though that service wasn’t in the capacity as an EE. The statute doesn’t say, “…of each employee who has performed service for the employer, in the capacity of an employee, during at least 3 of the immediately preceding 5 years…” It just says, “performed service for the employer.”
 

#6
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Oh - that's an interesting read.

I read it as if an employee who has performed any services for the employer during at least three of the preceding five years has met this requirement. And the research that I do never really focuses on the very particular terminology. But I completely see what you are seeing here - which again was my original issue. But I was looking for "converted" I/C's etc so going down the wrong path. Have you come across this before?

Thank you! I might suggest passing for 2019 since a whole different plan is starting in 2020.
 

#7
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Back to this issue. I have a friend who sent me a summary discussion from some ERISA bible he has. I know that a SEP doesn't follow ERISA rules, but wondered if it would be the same thing. The passage was a direct discussion about if an I/C is hired by the employer?

"Assuming the prior independent contractor status was valid, the employer would treat the
individual as a new employee on the date the individual actually becomes an employee. For qualified plan purposes, the
employer would only count the individual's service as an employee, and would treat the date the independent contractor
becomes an employee as his employment commencement date for purposes of determining when he satisfies the service
requirements for entry into the employer's qualified plan."

I know this isn't authoritative, but I would have to think this comes up more often than not?
 


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