Moving from SEP to SIMPLE IRA or 401K for a Sole-proprietor | Ed Slott and Company, LLC

Moving from SEP to SIMPLE IRA or 401K for a Sole-proprietor

Thank you for your help in advance.
I have a sole-proprietor attorney who has a couple of employees. He just operates under a DBA.
He does issue W2s for those employees. He currently has a SEP IRA.
Now, as those employees are soon to be eligible for the SEP IRA.

Following are some questions:
1. both employees were hired in 2018 working full-time. the group had 2-yr eligibility. Suppose those employees quit sometime during 2019, is the employer still responsible for making SEP contribution for the employees for 2019? they made more than $500 for those two different calendar years. The client will make his SEP contribution in 2020... how will that work?

2. Can a Sole-proprietor open up a SIMPLE IRA and make his/her EE contribution?

  • The SEP IRA employee work requirement applies to preceding years. For these employees, 2019 is not a preceding year and the employees only have 2018, which is only one preceding year and falls short of the 2 year requirement. They will not be eligible until 2020 for SEP contributions.
  • Not if any SEP contributions are made for 2019, as the SIMPLE IRA must be the only plan for a calendar year. This employer would have to wait and adopt a SIMPLE IRA effective 1/1/2020. 

Thanks, Alan!Clarifying my second question, is it possible for a Sole-p to set up a SIMPLE IRA in general? and contribute their EE cocntribution without setting up a W2?

Yes, the sole prop can establish a SIMPLE IRA, SEP IRA, or sole 401k with the latter generating the largest potential contribution.


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