PLR 200003057: Employer's pension arrangement qualifies as a simplified employee pension

Plain-English summary

An employer asked whether its individually designed pension arrangement met the rules for a simplified employee pension (SEP). The IRS concluded that Plan Z qualified under § 408(k) based on the submitted plan documents and information. It also said that contributions to a qualified SEP generally are deductible, subject to § 404(h). The ruling does not cover the plan's continued qualification after amendments, changes in law, adoption of another qualified plan, or failure to operate under its written terms.

Ruling snapshot

• Question: Does the employer's Plan Z satisfy the requirements for a SEP under § 408(k)?
• Outcome: Approved on the submitted plan terms and information.
• Key authorities: IRC §§ 408(k), 415(e), 404(h); Rev. Proc. 87-50.

Full text (IRS public release)

200003057

Internal Revenue Service                 Department of the Treasury
Uniform Issue List: 408.09-00          Washington, DC 20224

In Reference to: OP:E:EP:T4
Date: [illegible]

Legend:
Company M =
Plan X =
Plan Y =
Plan Z =

This is in response to your letter dated September 30, 1998, as supplemented by your
letter of June 28, 1999, submitted by your authorized representative, requesting a private letter
ruling with respect to an individually designed Simplified Employee Pension (“SEP”) adopted by
Company M. You have requested a ruling that Plan Z satisfies the requirements of section
408(k) of the Internal Revenue Code.

Code section 408(k)(1) defines a SEP as an individual retirement account or individual
retirement annuity (“IRA”) with respect to which the requirements of paragraphs (2), (3), (4), and
(5) of subsection 408(k) are met. A plan satisfying those requirements will be a qualified SEP.

Code section 408(k)(2) provides that during each calendar year the employer must make
a contribution on behalf of each employee who (A) has attained age 21, (B) has performed
services for the employer during at least 3 of the immediately preceding 5 calendar years, and
(C) received at least $300 (as adjusted by section 408(k)(8)) in compensation (within the
meaning of section 414(q)(7)) from the employer for the year. For this purpose, the employer
may exclude from consideration employees described in subparagraphs (A) (concerning certain
employees covered by a collective bargaining agreement) and (C) (concerning nonresident
aliens) of section 410(b)(3).

Code section 408(k)(3)(A) provides that the employer contributions made to a SEP may
not discriminate in favor of any highly compensated employee (within the meaning of section
414(q)). Under section 408(k)(3)(C), contributions will not be considered discriminatory if they
bear a uniform relationship to the total compensation (not in excess of the first $150,000) of
each employee maintained in the SEP.

Code section 408(k)(4)(A) provides that a SEP may not condition employer contributions

on the retention in Plan Z of any portion of the amount contributed. Section 408(k)(4)(B) also
provides that the employer may not prohibit withdrawals from the SEP.

Code section 408(k)(5) provides that employer contributions to a SEP must be
determined under a written allocation formula which specifies (A) the requirements which an
employee must satisfy to share in an allocation and (B) the manner in which the amount
allocated is computed.

Revenue Procedure 87-50, 1987-2 C.B. 647, provides that the SEP agreement must be
used with an Internal Revenue Service (IRS) model IRA or an IRS approved master or
prototype IRA.

Code section 415(e) provides certain limitations on contributions and benefits for a year
when an employee participates or has participated in both a defined benefit plan and a defined
contribution plan maintained by the same employer. In this case, the information you have
furnished on accrued benefits from the terminated defined benefit plan indicates that, even with
the additional contributions to the SEP, the section 415 limitations will not be violated.

Based on the above, we conclude that Plan Z satisfies the requirements of Code section
408(k) and qualifies as a SEP. Employer contributions to a qualified SEP generally are
deductible subject to the provisions of section 404(h).

This ruling is based on the provisions of Plan Z as contained in the documents and
information submitted to our office with your request dated September 30, 1998, as
supplemented by your submission of June 28, 1999.

This ruling has no bearing on the continued qualification of Plan Z as a SEP in the event
of any amendments to Plan Z, changes in the applicable statutes and regulations, the adoption
of any other qualified plan by Company M, or the failure of Plan Z to comply with the terms of its
plan documents during its operation.

A copy of this letter has been sent to your authorized representative in accordance with
a power of attorney on file in this office.

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of the
Internal Revenue Code provides that it may not be used or cited by others as precedent.

Sincerely yours, John G. Riddle, Jr., Chief, Employee Plans, Technical Branch 4