Stupid question - very small client has SEP for which all employees are eligible and receive around 5% per year. Most employees (5 of 8) are part time - less than 1,000 hours per year. Employer does not want to decrease benefits for anyone but wants more for self.

I don't think there are any prohibitions against continuing SEP as is (everyone is eligible and receives 5%) and adding a 401(k) Profit Sharing with 1 year (1,000 hours), age 21, semiannual entry so that the owner and the 2 other employees could also defer salary and perhaps receive Safe Harbor contribution and discretionary contribution as long as we satisfy top heavy (5% in SEP would do it, wouldn't it?), 415 and deductibility, etc...

What am I missing?

Thanks,
Kathy

A 401(k) would probably be more effective than the SEP. The SEP could however be amended into an integrated SEP. Owner could make additional contributions to the extent of compensation above a certain level. If the TWB is used, the excess compensation (not in excess of the $200K +COLA limit) would be multiplied by 5%. If employees got 5.7%, the excess compensation could be multiplied by 5.7% (the limit).

If a prototype SEP is used, the employer could maintain both plans. The 401(k) deduction limit is reduced by SEP contributions of participants in the SEP that also are eligible to participate in the 401(k).

A 5% contribution would satisfy the SEPs top-heavy requirement.

Hope this helps.