Salary Reduction Arrangement

A SEP may include a salary reduction arrangement. Under this type of arrangement, you can elect to have your employer contribute part of your pay to your SEP-IRA. Only the remaining portion of your pay is currently taxable. The tax on the contribution is deferred. This choice is called an elective deferral.

Only SEPs that allowed employees to choose elective deferrals as of December 31, 1996, can include salary reduction arrangements.

Limits on deferrals. In general, the total income you can defer under a salary reduction arrangement included in your SEP and certain other elective deferral arrangements, for 2000, is limited to $10,500. This limit applies only to the amounts that represent a reduction from your salary, not to any contributions from employer funds.

Generally, elective deferrals are excluded from your income in the year of deferral, but are included in wages for social security, Medicare, and unemployment (FUTA) tax purposes.

Excess deferrals. Excess deferrals not withdrawn by April 15 are considered regular IRA contributions and are subject to the IRA contribution limits.

Overall limits on SEP contributions. Contributions, including elective deferrals (salary reductions), made by your employer to the SEP-IRA are subject to the overall limit of 15% of your compensation (generally up to $170,000 for 2000) or $30,000, whichever is less. In effect, the overall limit for 2000 is $25,500 (15% x $170,000).

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