Please forgive the cross-posting from the small plans message board. Any recommendations on which is the best plan in the following circumstance? Would prefer a plan that permits the largest contribution.

Small law firm has 2 partners, both highly compensated employees (X and Y), 1 attorney (Z), and 4 staff people. X and Y contribute to a SEP plan. X and Y pay Z and salary and issue a W2. X and Y pay Z a 50% commission on any business Z brings in and issue Z a 1099 for that commmission.

I understand there are issues with X and Y issuing both a W2 and 1099, but if Z pays both the er and ee portions of FICA, still a problem?

Also, Z had originally intended on making a contribution to a SEP plan. However, instead can Z can set up a profit sharing plan for Z only in 2003? Z's salary plus commission is currently less than $80K, but expected to grow. No staff ees nor X or Y are interested in participating in the profit sharing plan.

What issues with
-starting profit sharing plan at end of year?
-discrimination testing?
-contribution limits?

Dear Cross-Poster

The 1099 wd appear to be correct unless the attorney was a partner. If the attorney was a partner, his efforts are for the partnership, and the renumeration is earned income.

If the employer picks up the attorney's FICA, be sure to include that amount into income on the attorneys Form W-2 (as it is additional compensation). If FICA is paid on that amount, then the calculations stops at 1 cent (and can take awhile).

It does not appear that contributions have been made for ALL SEP eligible employees. If that is the case, then, the plan is bad and all SEP contributions are excesses. If that is the case. a salary reduction 401(k) plan could be implemented for 2003, but ADP testing IS required and so this plan may be moot without rank-and-file participation. Safe-Harbor designs might also be available and that wd negate the ADP testing, but require some matching contributions (to those that make contributions). In any event, the employer may have to contribute a top-heavy contribution (up tp 3% to all non-key employees). If employer profit-sharing contributions are made to the PS plan, then all eligible employees must receive allocations.

If the SEP is a valid plan, then the employer is stuck with it for 2003.

The 401(k) elective limits for plans starting in 2003 is $12,000, plus catch-up contributions of up to $2,000 if age 50 or older and the plan permits them to be made.

Hope this helps you and answers all your questions.

2 Partners' financial advisors set up "individual" SEPs for each of them. It may have been at a time when they had no other staff employees. If no other ee is participating, does that mean all of their SEP contributions are excesses from the time they started hiring other ees?

If the partnership did not adopt the SEP then there may be no plan even though both individuals established plans for their sole-proprietorships. OTOH, from Form 5305A-SEP--

Arguably, then, if the entities are "related" (see above), the plan would be valid (if it covered all eligible employees of all "related" employers) without a formal adoption by the partnership.

I suspect that the 3 employers are not controlled or under common control; pray for an affilliated service group. See IRC 414(a), (b), and ©, 414(m).