Form 5305a-Sep - Salary Reduction Simplified Employee Pension - Individual Retirement Accounts Contribution Agreement Page 3

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Form 5305A-SEP (Rev. 6-2006)

Page

SEP or arrangement has made excess

nature or location of the employment or the

contributions are excess contributions. See

elective deferrals for a calendar year, the

services performed (such as the exception for

Excess SEP Contributions—Deferral

employee must withdraw those deferrals by

agricultural

labor

section

3401(a)(2)).

Percentage

Limitation on page 3 and the

April 15 following the calendar year to which

Compensation also includes earned income

Deferral Percentage Limitation Worksheet on

the deferrals relate. Deferrals not withdrawn

under section 401(c)(2). Compensation does

page 8.

by April 15 will be subject to the IRA

not include any employer SEP contributions,

including elective deferrals. Compensation, for

contribution limits of sections 219 and 408

Effective Date

and may be considered excess contributions

purposes of the $450 rule, is the same, except

Insert the date the provisions of this

to the employee’s IRA. For the employee,

it includes deferrals made to this SEP and any

agreement are effective.

these excess elective deferrals are subject to

amount not includible in gross income under

a 6% tax on excess contributions under

section 125 or section 132(f)(4).

Eligible Employees

section 4973. Income on excess elective

● The maximum an employee may elect to

All eligible employees must be allowed to

deferrals is includible in the employee’s

defer under this SEP for a year is the smaller

participate in the SEP. An eligible employee is

income in the year it is withdrawn from the

of 25% of the employee’s compensation or

any employee who: (1) is at least 21 years

IRA. The income must be withdrawn by April

the limitation under section 402(g), as

old, and (2) has performed “service” for you

15, following the calendar year for which the

explained below.

in at least 3 of the immediately preceding 5

deferrals were made. If the income is

Note: The deferral limit is 25% of

years.

withdrawn after that date and the recipient is

compensation (minus any employer SEP

not 59

⁄

years of age, it may be subject to

You can establish less restrictive eligibility

contributions, including elective deferrals).

the 10% tax on early distributions under

requirements, but not more restrictive ones.

Compute this amount using the following

section 72(t).

Service means any work performed for you

formula: Compensation (before subtracting

for any period of time, however short. If you

Excess SEP Contributions—Deferral

employer SEP contributions)

20%.

are a member of an affiliated service group, a

● If you make nonelective contributions to

Percentage Limitation

controlled group of corporations, or trades or

this SEP for a calendar year, or maintain any

The amount each of your “highly

businesses under common control, service

other SEP to which contributions are made

compensated employees” may contribute to a

includes any work performed for any period

for that calendar year, then contributions to

salary reduction SEP is also limited by the

of time for any other member of such group,

all such SEPs may not exceed the smaller of

“deferral percentage limitation.” This is based

trades, or businesses.

$44,000 (this is the amount for 2006; for later

on the amount of money deferred, on

years, it may be increased for cost-of-living

Excludable Employees

average, by your nonhighly compensated

adjustments) or 25% of compensation for any

employees. Deferrals made by a highly

The following employees do not have to be

employee.

compensated employee that exceed this

covered by the SEP: (1) employees covered

● Catch-up elective deferral contributions

deferral percentage limitation for a calendar

by a collective bargaining agreement whose

(see Section 402(g) Limit below) are not

year are considered “excess SEP

retirement benefits were bargained for in

subject to the 25% limit.

contributions” and must be removed from the

good faith by you and their union, (2)

employee’s SEP-IRA, as discussed below,

nonresident alien employees who did not earn

Section 402(g) Limit

unless the following exception applies.

U.S. source income from you, and (3)

Excess SEP contributions of a highly

Section 402(g) limits the maximum amount of

employees who received less than $450 (this

compensated employee who is 50 or older

compensation an employee may elect to

is the amount for 2006; for later years, it may

before the end of the calendar year do not

defer under a SEP (and certain other

be increased for cost-of-living adjustments) in

have to be removed from the employee’s

arrangements) during the calendar year. This

compensation during the year.

limit is $15,000 for 2006 and later years. After

SEP-IRA to the extent the amount of the

Elective Deferrals

2006, the $15,000 amount may be increased

excess SEP contributions is less than the

catch-up elective deferral contribution limit

for cost-of-living adjustments. In the case of

You may permit your employees to make

(see Section 402(g) Limit above) reduced by

an eligible employee who is 50 or older

elective deferrals through salary reduction

any catch-up elective deferral contributions

before the end of the calendar year, an

that, at the employee’s option, may be

already made for the year.

additional amount of compensation

contributed to the SEP or received by the

(“catch-up elective deferral contributions”)

The deferral percentage limitation for your

employee in cash during the year.

may be deferred during the year. The limit on

highly compensated employees is computed

Notwithstanding any limit in Article IIIB(1) or

catch-up elective deferral contributions is

by first averaging the “deferral percentages”

IIIC, an eligible employee who is 50 or older

$5,000 for 2006 and later years. After 2006,

(defined below) for the eligible nonhighly

before the end of the calendar year can defer

the $5,000 amount may be increased for

compensated employees for the year and

an additional amount of compensation during

cost-of-living adjustments.

then multiplying this result by 1.25.

the year up to the catch-up elective deferral

Only elective deferrals are included in this

contribution limit (see Section 402(g) Limit

Excess Elective Deferrals

computation. Nonelective SEP contributions

below).

Amounts deferred for a year in excess of the

may not be included. The determination of

You must inform your employees how they

section 402(g) limit are considered “excess

the deferral percentage for any employee is

may make, change, or terminate elective

elective deferrals” and are subject to the rules

made under section 408(k)(6).

deferrals. You must also provide a form on

described below.

For purposes of this computation, the

which they may make their deferral elections.

The limit applies to the total elective

calculation of the number and identity of

You may use the Model Salary Reduction

deferrals the employee makes for the

highly compensated employees, and their

SEP Deferral Form (elective form) on page 5,

calendar year, from all employers, under the

deferral percentages, is made on the basis of

or a form that explains the information

following arrangements:

the entire “affiliated employer” (defined

contained in this form in a way that is written

● Salary reduction SEPs under section

below).

to be understood by the average plan

408(k)(6);

participant.

A worksheet is provided on page 8 to

● Cash or deferred arrangements under

assist in figuring the deferral percentage. You

SEP Requirements

section 401(k);

may want to photocopy it for yearly use.

● Elective deferrals may not be based on

● Salary reduction arrangements under

The following definitions apply for purposes

more than $220,000 of compensation (this is

section 403(b); and

of computing the deferral percentage

the amount for 2006; for later years, it may be

limitation under this SEP:

● SIMPLE IRA Plans under section 408(p).

increased for cost-of-living adjustments).

1. Deferral percentage is the ratio

Thus, an employee may have excess

Compensation, for purposes other than the

(expressed as a percentage to 2 decimal

elective deferrals even if the amount deferred

$450 rule (see Excludable Employees above),

places) of an employee’s elective deferrals for

under this SEP alone does not exceed the

a calendar year to the employee’s

is defined as wages under section 3401(a) for

section 402(g) limit.

compensation for that year. For this purpose,

income tax withholding at the source but

If an employee who elects to defer

without regard to any rules that limit the

an employee’s elective deferrals does not

compensation under this SEP and any other

remuneration included in wages based on the

include any catch-up elective deferral

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