The controlled group rules are mathematical; there is no way around those rules if they apply.
If the owner is over 59-1/2, the contribution can be made and later withdrawn without penalty.
As previously pointed out, the SEP rules require that all eligible employees be covered (but rates may differ, see below).
The document likely defines the employer as including all other employers that are controlled, related, or affiliated and provides for allocation based in proportion to compensation.
In regard to a PLR, you might wish to see PLR 88224019 (see below), regarding a rate per hour SEP. Compare to Prop. Treas. Reg. Section 1.408-8© regarding uniform allocation requirements. Proposed 1.408-8©(1) provides, in part, that a rate of contribution which decreases as compensation increases shall be considered uniform.
QUOTE
Date: March 17, 1988
Refer Reply to: E:EP:R:9
Dear * * *
This is in response to a ruling request dated December 2, 1987, and a letter amending and updating this request dated January 27, 1988, which were submitted by your authorized representative on your behalf. Your request concerns whether a contribution formula based upon hours worked meets the Simplified Employee Pension (SEP) anti- discrimination requirements of Internal Revenue Code section 408(k)(3).
Your representative submitted the following facts on your behalf:
Company M, a tax exempt organization, entered into a collective bargaining agreement on July 1, 1984. In a revised addendum to this collective bargaining agreement, dated March 13, 1985, Company M agreed to contribute certain amounts for each covered employee into a supplemental pension plan which was to be "an individual account type plan".
On April 1, 1987, Company M adopted a Simplified Employee Pension-Individual Retirement Accounts Contribution Agreement (SEP- IRA Agreement), effective as of December 31, 1986. This SEP-IRA Agreement was designed to provide the individual account type plan provided for in the addendum to the collective bargaining agreement. Further, this SEP-IRA Agreement was adopted using Internal Revenue Service Form 5305-SEP, which you propose to modify in certain respects.
Individual retirement accounts (IRAs) for the employee- participants were established with Company N, which accepted the employer contributions which had been set aside for each employee pursuant to the addendum of the collective bargaining agreement. Pursuant to the SEP-IRA Agreement, SEP contributions by Company M to the IRAs are determined at a stated amount (in cents) for each hour worked by an employee-participant, regardless of the employee's compensation level. The employees of Company M are compensated with a salary and are not compensated for overtime. Further, they are credited with 80 hours of service for each two week payroll period, nothing more and nothing less, and it is this number of hours which is used to determine the SEP contributions.
Based on these facts your authorized representative requests a ruling that the contribution formula set-out in the SEP-IRA Agreement satisfies the requirements of Code section 408(k)(3).
Section 408(k)(3)(A) of the Code provides that the requirements of this section are met with respect to a SEP for a calendar year if for such year the contributions made by the employer to the SEP for his employees do not discriminate in favor of any highly compensated employee.
Code section 408(k)(3)© provides, in relevant part, that employer contributions to SEPs shall be considered discriminatory unless contributions thereto bear a uniform relationship to the total compensation (not in excess of the first $200,000) of each employee maintaining a SEP.
Proposed Income Tax Regulation section 1.408-8©(1) provides, in part, that a rate of contribution which decreases as compensation increases shall be considered uniform.
In this case the maximum percentage of compensation contributed on behalf of a member of the highly compensated employee group will not exceed the percentage of compensation contributed on behalf of any participant who is not a highly compensated employee. In fact, since each employee is credited with 80 hours of service for each two week payroll period and the amount of contribution remains constant despite increases in compensation, the rate of contribution is viewed as decreasing.
Accordingly, we conclude that the contribution formula of the SEP-IRA Agreement shall be considered uniform and is not in and of itself discriminatory, within the meaning of section 408(k)(3) of the Code.
This is not a determination as to the actual operation of this contribution formula contained in the plan, but only a determination as to whether Company M's plan in form retains its SEP status when it contains this contribution formula.
A copy of this ruling has been sent to your authorized representative pursuant to the power of attorney on file with this office.
Sincerely yours,
Allen Katz
Chief, Employee Plans
Rulings Branch