3638. How are contributions to a simplified employee pension taxed?Nuco Employeercline202014-06-04T12:48:00Z2014-06-04T12:48:00Z25583185Hewlett-Packard267373614Site Map/Individual Retirement Plans/Simplified Employee Pension (SEP)SEP2005-01-25T00:00:00ZTaxFactsDefaultArticle114930240-00-tf1.xml241.00;#1794;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 1What is a simplified employee pension?131900.000000000TaxFactsDefaultArticle2010-01-19T08:12:31ZSBMEDIA\moss-admin4111dbb3-6119-41fc-9d9c-28768801cec4|1fb82894-7172-48f5-970a-5c12491bb821|d576b6ea-ae8e-4555-b99c-659d6cce42d73638. What are the contribution limits for a simplified employee pension ?Employee contributions: An employee may treat his SEP account as a traditional IRA and make deductible or nondeductible contributions to it under the general IRA rules described in Q 3603 to Q 3624. However, any dollars contributed to the SEP will reduce the amount the individual employee can contribute to other IRAs, including Roth IRAs, for the year.Example (1): Nancy’s employer, JJ Handyman, contributes $5,000 to Nancy’s SEP-IRA at ABC Investment Co. based on the terms of the JJ Handyman SEP plan. Nancy, age 45, is permitted to make traditional IRA contributions to her SEP-IRA account at ABC Investment Co., and she contributes $3,000 in 2013. If Nancy also wants to contribute to her Roth IRA at XYZ Investment Co. for 2013, she can contribute $2,000 ($5,000 maximum contribution less the $3,000 already contributed to her SEP-IRA) by April 15, 2014.Salary deferrals are only allowed to Salary Deferral SEPs, known as SAR-SEP, and no new SAR-SEPs are permitted as of 1997 (Q3640).Employer Contributions: Contributions made by an employer on behalf of an employee to a SEP are excludable from the employee’s income to the extent that they do not exceed the lesser of 25% of compensation from the employer (determined without regard to that employer’s contribution to the SEP) or $52,000 in 2014.IRC Secs. 402(h)(2), 415(c)(1)(A); IR-2013-86. Compensation is capped by the limits in effect under IRC Sec 414(s) ($260,000 for 2014) (Q 3761). Despite the $260,000 limit on compensation, the maximum permitted SEP contribution is capped at $52,000 for 2014 (where $52,000 is less than $260,000 x 25%). Planning Point: Interestingly, “compensation” is defined for these purposes as amounts actually includible in the employee’s gross income; consequently, “elective deferrals” by an employee (i.e. amounts contributed to a qualified retirement plan) would not be considered in the “lesser of” calculation above as compensation. IRC Secs 402(h)(2)(B). This definition of compensation, however, differs from the definition of compensation used to determine the employer’s deduction when contributing to an employee’s SEP, which does consider elective deferrals when determining income (Q3639).When determining the contribution limits of a “self-employed” individual, “compensation” is the individual’s net earnings from self-employment.If an individual is employed by more than one employer (other than employers who are under common control or compose a controlled or affiliated service group) during the tax year, the 25% limit is applied separately to each employer.See IRC Sec. 219(b)(2). Under proposed regulations, contributions by (and compensation received from) employers who are under common control or who are members of a controlled group must be aggregated for purposes of this limit.See Prop. Treas. Reg. §1.219-3(c). It would seem that the IRS may also require such aggregation where the employers are members of an affiliated service group.If an individual is self-employed with respect to more than one trade or business, the maximum contribution will be the lesser of the amount determined by applying the limit separately to each trade or business or the amount determined by applying the limit as if the trades or businesses constituted one employer.See Prop. Treas. Reg. §1.219-3(c)(2). In an integrated plan, the 415 dollar limit must be reduced in the case of a highly compensated employee (Q 3804).IRC Sec. 402(h)(2)(B). Contributions are not subject to income tax withholding, FICA, or FUTA.IRC Secs. 3401(a)(12)(C), 3121(a)(5)(C), 3306(b)(5)(C). See also Rev. Rul. 65-209, 1965-2 CB 414.