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A recent call with a financial advisor in Kansas is representative of a common question regarding SEP contributions.
Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security, and Medicare. This is where we highlight the most relevant topics affecting your business.
“My client owns a business and maintains a simplified employee pension (SEP) plan for his employees. He died during the year. Can the business still make a SEP plan contribution on his behalf?”
While contributions to an IRA cannot be made after the account owner’s death, there is an exception for SEP plan contributions made to the traditional or Roth IRAs (1) (sometimes called “SEP IRAs”) of eligible employees under the plan. This exception exists because, if a SEP plan contribution is given, all eligible employees, including owner participants, must receive their allocation for the year, even if an employee has died.
Therefore, a business can contribute to its SEP plan on behalf of a deceased person (if otherwise eligible) after they pass for the year of their death, but the contribution would be based on compensation earned before their death (unless a flat dollar formula applies). The deadline for contributing is the tax filing date of the company’s tax return, including filing extensions. The person or entity next in line to run the business can make sure the contribution is made.
SEP plan contributions are made to traditional or Roth IRAs. Typically, IRAs cannot be funded after the owner’s death. When a SEP plan contribution is made, it must be allocated to all eligible participants pursuant to the terms of the plan. Therefore, SEP plan contributions made to the traditional or Roth IRAs of eligible participants are necessary, even if the contribution is made after an eligible employee’s death.
(1) Under SECURE Act 2.0, SEP plan sponsors can allow participants to treat their SEP contributions as Roth after-tax contributions as of 2023.