IRS OPENS OPINION LETTER PROGRAM FOR SEPs PROVIDING FOR EMPLOYEE ELECTIVE CONTRIBUTIONS.

Rev. Proc. 91-44

SECTION 1. PURPOSE

01 This revenue procedure modifies Revenue Procedure 87-50, 1987-2 C.B. 647, and Notice 87-62, 1987-2 C.B. 374, to permit a mass submitter or sponsoring organization to obtain an opinion letter for a prototype simplified employee pension (SEP) agreement that provides for contributions pursuant to an employee's election as described in section 408(k)(6) of the Internal Revenue Code of 1986. The revenue procedure provides a Model Amendment that a sponsor may use verbatim to add elective deferral provisions to an existing prototype SEP and also provides two other formats for sponsors to use to add elective deferral provisions to existing prototype SEPs or to use with new prototype SEPs that provide for elective deferrals.

SEC. 2. ISSUANCE OF OPINION LETTERS

01 Effective August 5, 1991, the Service will accept applications from sponsoring organizations for opinion letters on new or existing prototype SEPs that provide for elective deferrals. Applications will be processed in accordance with the procedures in Rev. Proc. 87-50, as modified by this revenue procedure.

SEC 3. ELIGIBLE EMPLOYERS

01 A prototype elective SEP may NOT be used by an employer who:

(1) At any time during the prior plan year had more than 25 employees eligible to participate in the SEP;

(2) Maintains or has maintained a defined benefit plan, even if now terminated;

(3) Is a state or local government or tax-exempt organization.

(4) Has any leased employees (as described in section 414(n)(2) of the Code.)

02 A prototype elective SEP may be used by an employer who: is a member of a controlled group of corporations (as defined in section 414(b) of the Code) which includes the employer; any trade or business (whether or not incorporated) which is under common control (as defined in section 414(c)) with the employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in section 414(m)) which includes the employer; and any other entity required to be aggregated with the employer pursuant to regulations under section 414(o). Such an employer may adopt a prototype elective SEP, however, ONLY if all eligible employees of all of the members of such groups, trades, or businesses are eligible to make elective deferrals to the SEP, and provided that in the prior plan year there never were more than 25 employees eligible to participate in the SEP, in total, of all of the members of such groups, trades, or businesses.

SEC. 4. SEP ELECTIVE DEFERRAL AMENDMENTS

01 REQUIRED PROVISIONS. To request a favorable opinion letter on a prototype SEP that provides for elective deferrals and is intended to meet the requirements of section 408(k)(6) of the Code, a sponsor must submit a SEP that provides for elective deferrals in accordance with one of the following procedures: the Model Amendment, the Short Amendment, or the Long Amendment.

02 THE MODEL AMENDMENT. An existing prototype SEP may be amended through use of the Model Amendment. The Model Amendment is reproduced in the Appendix below. Use of the Model Amendment requires use of two additional documents, the "Notice to Adopting Employer" and the "Notice to Employees". Each of these notices also is reproduced in the Appendix.

(1) The Model Amendment is appropriate for use only by sponsors of prototype SEPs that have received a favorable opinion letter on their SEPs, dated July 18, 1984 or later, and employers who have adopted such SEPs. A sponsor of a new prototype SEP that has not yet received a favorable opinion letter may use the Model Amendment to incorporate elective deferral provisions in the SEP. Such a SEP, however, should be submitted for review in accordance with the procedures outlined in section 5.03 of this revenue procedure concerning new prototype SEPs that use a Short Amendment.

(2) The Model Amendment must be adopted on a word-for-word basis unless otherwise specified in the document. The related notices must also be used on a word-for-word basis.

(3) To amend a SEP through use of the Model Amendment, an adopting employer must complete and execute all of the provisions of the Model Amendment. Employers with existing SEPs who do not wish to add elective deferral provisions to their SEPs need take no action at all.

(4) The sponsor of a prototype SEP that has been amended through use of the Model Amendment must provide a copy of the related "Notice to Adopting Employer" to all employers who choose to adopt the amended SEP. In addition, the sponsor must provide each adopting employer with the "Notice to Employees" and inform the employer that this notice must be provided to all employees who are eligible to participate in the amended SEP and to all employees who, in the future, become eligible to participate in the amended SEP.

03 THE SHORT AMENDMENT. The Short Amendment is appropriate for use by sponsors of existing prototype SEPs that have received a favorable opinion letter on their SEPs, dated July 18, 1984 or later, and employers who have adopted such SEPs. The Short Amendment may also be used by a sponsor who is including elective deferral provisions in a new prototype SEP.

(1) A Short Amendment is one written by the sponsor of the prototype SEP. It must contain at least the same information as contained in each provision of the Model Amendment but need not follow the Model Amendment on a word-for-word basis and may contain more information than is contained in the Model Amendment.

(2) As with the Model Amendment, the sponsor of a new or existing prototype SEP that uses a Short Amendment must provide a copy of the "Notice to Adopting Employer" to all employers who choose to adopt the amended SEP. In addition, the sponsor must provide each adopting employer with the "Notice to Employees" and inform the employer that this notice must be provided to all employees who are eligible to participate in the amended SEP and to all employees who, in the future, become eligible to participate in the amended SEP. These notices must be used on a word-for-word basis.

04 THE LONG AMENDMENT. An existing prototype SEP may be amended through use of a Long Amendment. A sponsor may follow the procedure described in 4.04(1), below, for SARSEPs that are deemed top-heavy. Alternatively, the sponsor may choose instead to follow the procedure for SARSEPs that are not deemed top-heavy, as described in 4.04(2), below. Either type of Long Amendment may be used by a sponsor who is including elective deferral provisions in a new prototype SEP.

(1) LONG AMENDMENT-DEEMED TOP HEAVY: A Long Amendment, like a Short Amendment, must contain at least the same information as contained in each provision of the Model Amendment (other than section 3.4 concerning the Cash Bonus Option) but need not follow the Model Amendment on a word-for-word basis. Unlike the Short Amendment, however, sponsors using a Long Amendment need NOT provide adopting employers with a "Notice to Adopting Employer". Instead, the Long Amendment itself must include certain information contained in the "Notice to Adopting Employer", as follows: a) the information provided in section III, concerning the effective date of the amendment; b) the information provided in section IV, concerning deductibility of contributions; c) the information contained in section VI. A., B., and C., concerning the limitations on elective deferrals; d) the information provided in section VIII, concerning the determination and testing of deferral percentages (including all definitions); e) the information provided in section IX, concerning the tax consequences of excess SEP contributions and employee notification; f) the information provided in section X, concerning a failure to satisfy the 50% test; and g) the information provided in section XII, concerning top-heavy requirements (including all definitions). The Long Amendment also must contain the name, address, and telephone number of the person or institution to which adopting employers may direct inquiries concerning the SEP.

(2) LONG AMENDMENT-NOT DEEMED TOP-HEAVY: A Long Amendment must satisfy the requirements described in 4.04(1) above with respect to Long Amendments that are deemed top-heavy, with the following exceptions. These exceptions are that the Amendment need not contain the information provided in section VI of the Model Amendment or that contained in section XII of the "Notice to Adopting Employer." A sponsor who does not wish to have a SARSEP that is deemed top-heavy must, however, incorporate within the plan document all necessary language to enable the SARSEP to meet the applicable requirements if the SARSEP does become top-heavy.

(3) A sponsor utilizing a Long Amendment must provide each adopting employer with the "Notice to Employees" and inform the employer that this notice must be provided to all employees who are eligible to participate in the amended SEP and to all employees who, in the future, become eligible to participate in the amended SEP. This notice must be used on a word-for-word basis.

05 EFFECTIVE DATE. No amendment may be effective earlier than upon adoption by the adopting employer. In addition, no amendment may provide for the deferral of compensation an employee received or had a right to receive before adoption by the employer of the elective deferral provisions and execution by the employee of a deferral election.

SEC. 5. INSTRUCTIONS TO SPONSORING ORGANIZATIONS

01 A mass submitter or sponsoring organization that desires a written opinion as to the acceptability of the form of a prototype SEP that uses a Model, Short, or Long Amendment and is intended to meet the requirements of section 408(k)(6) of the Code should submit its request to the National Office in accordance with Rev. Proc. 87- 50, as modified by this revenue procedure. Sponsors must follow the procedure specified below according to the type of amendment adopted.

02 THE MODEL AMENDMENT. This procedure applies only to a mass submitter or sponsoring organization that amends a prototype SEP that has received a favorable opinion letter, dated July 18, 1984 or later, solely to adopt the Model Amendment. Opinion letters will be issued as soon as clerically feasible to sponsors of such SEPs.

(1) A sponsor of such a SEP must submit the following items in order to receive an opinion letter with respect to the Model Amendment:

(a) A certification by the sponsor that the SEP has been amended through adoption of the Model Amendment on a word-for-word basis and that no other changes have been made to the SEP since its last favorable opinion letter (other than changes required or permitted by Notice 87-62, 1987-2 C.B. 374);

(b) A certification by the sponsor that the sponsor will provide each adopting employer with the "Notice to Adopting Employer" and the "Notice to Employees" that is identical, on a word-for-word basis, to the provisions of the notices reproduced in the Appendix of this revenue procedure;

(c) A completed, signed, and dated Form 5306-SEP (Application for Approval of Prototype Simplified Employee Pension -- SEP) with "Model Amendment" printed or typed in bold letters in the upper right corner of the Form 5306-SEP. The form must include the file folder number of the SEP as originally approved; and

(d) A user fee or fees in an amount determined in accordance with section 6.03 of Rev. Proc. 90-17, 1990-1 C.B. 47 (as amended by this revenue procedure.)

(2) A sponsor that receives a favorable opinion letter with respect to the Model Amendment need not automatically provide copies of the letter to all adopting employers but must provide copies of the Model Amendment, along with the "Notice to Adopting Employer" and the "Notice to Employees", in accordance with section 6.04(2) of Rev. Proc. 87-50, to those adopting employers that wish to execute the Model Amendment.

03 THE SHORT AMENDMENT. This procedure applies only to a mass submitter or sponsoring organization that either: 1) amends a prototype SEP that has received a favorable opinion letter, dated July 18, 1984, or later, solely to adopt the Short Amendment; or 2) submits a request for an opinion letter on a new prototype SEP that provides for elective deferrals pursuant to the format and procedure of the Short Amendment.

(1) Prototype SEPs that are submitted using the Short Amendment format will, to the extent administratively feasible, be accorded more expeditious processing than prototype SEPs that use the Long Amendment format.

(2) A sponsoring organization of such a SEP must submit the following items in order to receive an opinion letter with respect to the SEP:

(a) For an existing prototype SEP, a completed, signed, and dated Form 5306-SEP (Application for Approval of Prototype Simplified Employee Pension -- SEP) with "Short Amendment" printed or typed in bold letters in the upper right corner of the Form 5306-SEP. The form must include the file folder number of the SEP as originally approved. The sponsor must also include a certification that the SEP has been amended through adoption of the Short Amendment and that no other changes have been made to the SEP since its last favorable opinion letter (other than changes required or permitted by Notice 87-62);

(b) For a new prototype SEP, a completed, signed, and dated Form 5306-SEP with "Short Amendment -- New" printed or typed in bold letters in the upper right corner of the Form 5306-SEP;

(c) A copy of the SEP;

(d) A certification by the sponsor that the sponsor will provide each adopting employer with the "Notice to Adopting Employer" and the "Notice to Employees that is identical, on a word-for-word basis, to the provisions of the notices reproduced in the Appendix of this revenue procedure; and

(e) A user fee or fees in an amount determined in accordance with section 6.03 of Rev. Proc. 90-17.

04 THE LONG AMENDMENT. This procedure applies to a mass submitter or sponsoring organization that either: 1) amends an existing prototype SEP to adopt a Long Amendment; or 2) submits a request for an opinion letter on a new prototype SEP that provides for elective deferrals pursuant to the format and procedure of the Long Amendment.

(1) A sponsoring organization of such a SEP must submit the following items in order to receive an opinion letter with respect to the SEP:

(a) For an existing prototype SEP, a completed, signed, and dated Form 5306-SEP (Application for Approval of Prototype Simplified Employee Pension -- SEP) with "Long Amendment" printed or typed in bold letters in the upper right corner of the Form 5306-SEP;

(b) For a new prototype SEP, a completed, signed, and dated Form 5306-SEP (Application for Approval of Prototype Simplified Employee Pension -- SEP) with "Long Amendment -- New" printed or typed in bold letters in the upper right corner of the Form 5306-SEP;

(c) A copy of the SEP; and

(d) A certification by the sponsor that the sponsor will provide each adopting employer with the "Notice to Employees" that is identical, on a word-for-word basis, to the provisions of the notice reproduced in the Appendix of this revenue procedure.

(e) A user fee or fees in an amount determined in accordance with section 6.03 of Rev. Proc. 90-17.

SEC. 6. EFFECT ON OTHER DOCUMENTS

01 Section 2.10 of Rev. Proc. 87-50 and Notice 87-62 are hereby modified to provide that the Service will issue opinion letters with respect to SEPs that provide for contributions pursuant to the employee's election as described in section 408(k)(6) of the Code.

02 Section 6.03 of Rev. Proc. 90-17 is modified to provide that where an approved SEP is amended solely by the adoption of the Model Amendment reproduced in the Appendix below, the user fee for a request for an opinion letter by a mass submitter, an identical adopter, or other sponsoring organization is one hundred dollars per plan document.

03 Notice 88-33, 1988-1 C.B. 513, is hereby modified to provide that the income allocable to an excess contribution to a SARSEP is includible in gross income in the year withdrawn from the IRA.

SEC. 7. EFFECTIVE DATE

01 This revenue procedure is effective as of August 5, 1991.

DRAFTING INFORMATION

01 The principal author of this revenue procedure is Gretchen Young of the Employee Plans Technical and Actuarial Division. For further information regarding this revenue procedure, please call the Employee Plans Technical and Actuarial Division's taxpayer assistance telephone service, Roger Kuehnle, or Ms. Young between the hours of 1:30 and 4 p.m., Eastern Time, Monday through Thursday, at (202) 566- 6783/6784, (202) 566-4707, or (202) 343-0729, respectively. (These telephone numbers are not toll-free numbers).

APPENDIX

The following are the Model Amendment, the "Notice to Adopting Employer", and the "Notice to Employees", three documents that may be used by sponsors of prototype SEPs to add elective deferral provisions to their SEPs.

Employers should consult with a professional tax advisor before deciding whether to adopt the Model Amendment.

MODEL AMENDMENT

SECTION I. PURPOSE

1.1. Purpose. It is the intention of the employer to incorporate this elective SEP amendment, which satisfies the requirements of section 408(k)(6) of the Internal Revenue Code of 1986 (the Code), and any amendments thereto, as part of its simplified employee pension plan (SEP) agreement.

1.2. Under this elective SEP amendment, the employer agrees to permit elective deferrals to be made in each plan year to the individual retirement account or individual retirement annuity (IRA) as described in section 408(a) or (b), respectively, of the Code, established by or on behalf of each of the employer's employees who are eligible to participate in the SEP.

SECTION II. PARTICIPATION REQUIREMENTS

2.1. Elective deferrals shall be permitted for a plan year only if:

a) Not less than 50% of the employees that are eligible to make elective deferrals elect, or have an election in effect, to have elective deferrals made to the SEP; and

b) The employer had no more than 25 employees eligible to participate in the SEP at any time during the prior plan year.

2.2. In the event that the 50% requirement of section 2.1.a is not satisfied as of the end of any plan year, then ALL elective deferrals made by employees for that plan year shall be considered "disallowed deferrals", i.e., IRA contributions that are not SEP-IRA contributions. The employer shall notify each affected employee, within 2-1/2 months following the end of the plan year to which the disallowed deferrals relate, that the deferrals are no longer considered SEP-IRA contributions. Such notification shall specify the amount of the disallowed deferrals and the calendar year in which they are includible in income and must provide an explanation of applicable penalties if the disallowed deferrals are not withdrawn in a timely fashion.

SECTION III. ELECTIVE DEFERRALS

3.1. Allocation of Elective Deferrals. The employer shall contribute and allocate to each employee's IRA an amount equal to the amount of the employee's elective deferrals. Elective deferrals will be paid by the employer to the employee's IRA trustee, custodian, or insurance company (in the case of a retirement annuity contract) or an IRA established on behalf of an employee by an employer.

3.2. Salary Reduction Agreement Option. An employee may elect to have elective deferrals made under this SEP through either single-sum or continuing contributions, or both, pursuant to a salary reduction agreement.

3.3. Amount of Elective Deferrals. An employee may elect to have his or her compensation reduced by the following percentage or amount per pay period, or for a specified pay period or periods, as designated in writing to the employer [CHECK ONE]:

[] An amount not in excess of [] percent of an employee's compensation.

[] An amount not in excess of [$] of an employee's compensation.

3.4. Cash Bonus Option. An employee may base elective deferrals on cash bonuses during the year that, at the employee's election, may be contributed to the SEP or received by the employee in cash. [] Check here if such elective deferrals may be made under this SEP.

3.5. Timing of Elective Deferrals. No deferral election may be based on compensation an employee received, or had a right to receive, before execution of the deferral election.

3.6. Under no circumstances may an employee's elective deferrals in any calendar year exceed the lesser of fifteen percent of his or her compensation (determined without including the SEP-IRA contributions), or the limitation under section 402(g) of the Code based on all of the plans of the employer.

3.7. If an employer maintains any other SEP to which non- elective SEP employer contributions are made for a plan year, or any qualified plan to which contributions are made for such plan year, then an employee's elective deferrals may be limited to the extent necessary to satisfy the maximum contribution limitations under section 415(c)(1)(A) of the Code.

3.8. Each employee's elective deferrals to this SEP may be based only on the first $200,000 of compensation (as adjusted annually in accordance with section 408(k)(8) of the Code.)

SECTION IV. EXCESS SEP CONTRIBUTIONS

4.1. Elective deferrals by a highly compensated employee must satisfy the deferral percentage limitation under section 408(k)(6) of the Code. Amounts in excess of the deferral percentage limitation will be deemed excess SEP contributions on behalf of the affected highly compensated employee or employees.

4.2. The employer shall notify each affected highly compensated employee, within 2-1/2 months following the end of the plan year to which the excess SEP contributions relate, of any excess SEP contributions to the highly compensated employee's SEP-IRA for the applicable year. Such notification shall specify the amount of the excess SEP contributions and the calendar year in which the contributions are includible in income and must provide an explanation of applicable penalties if the excess contributions are not withdrawn in a timely fashion.

SECTION V. DISTRIBUTIONS FROM SEP-IRAS

5.1. The employer shall notify each employee who makes an elective deferral to a SEP that, until 2-1/2 months after the end of a particular plan year, any transfer or distribution from that employee's SEP-IRA of SEP contributions (or income on these contributions) attributable to elective deferrals made during that plan year will be includible in income for purposes of sections 72(t) and 408(d)(1) of the Code.

SECTION VI. TOP-HEAVY REQUIREMENTS

6.1. Unless another plan of the employer is designated, in the space below, to satisfy the top-heavy requirements of section 416 of the Code, then the employer will make a minimum contribution each year to the IRA of each employee eligible to participate in this SEP (other than a key employee as defined in section 416(i)), which, in combination with other non-elective contributions, if any, is equal to the lesser of three percent of each employee's compensation or a percentage of such compensation equal to the percentage of compensation at which elective and non-elective contributions are made under the SEP for the plan year for the key employee for whom such percentage is the highest for the plan year.

[IF APPLICABLE, NAME THE PLAN OTHER THAN THIS SEP IN WHICH THE MINIMUM TOP-HEAVY CONTRIBUTION WILL BE MADE]

6.2. For purposes of satisfying the minimum contribution requirement under section 416 of the Code, all non-elective contributions under the SEP shall be taken into account, but elective deferrals shall not be taken into account.

SECTION VII. EFFECTIVE DATE

7.1. This elective SEP amendment shall be effective upon adoption.

[EMPLOYER NAME] [EMPLOYER SIGNATURE] [DATE]

NOTICE TO ADOPTING EMPLOYER

A simplified employee pension plan ("SEP") is a plan that provides you with a simplified way to enhance your employees' retirement income. Under an elective SEP, employees may choose whether to make elective deferrals to the SEP or to receive the amounts in cash. If elective deferrals are made, you contribute the amounts deferred by employees directly into an individual retirement arrangement (IRA) set up by or on behalf of the employee with a bank, insurance company, or other qualified financial institution. The IRA must be one for which the Internal Revenue Service has issued a favorable opinion letter or a model IRA published by the Service as Form 5305 -- Individual Retirement Trust Account or Form 5305-A -- Individual Retirement Custodial Account.

The information provided below is intended to assist you in understanding and administering the elective deferral provisions of your SEP.

I. EMPLOYERS WHO MAY NOT USE THIS SEP

This elective SEP may NOT be used if you are an employer who:

A. Has any leased employees as defined in section 414(n)(2) of the Code;

B. Maintains or has maintained a defined benefit plan, even if now terminated;

C. Had more than 25 employees eligible to participate in the SEP at any time during the prior plan year. (If you are a member of one of the groups described in section VIII. B. below, you may use this SEP, provided that in the prior plan year there never were more than 25 employees eligible to participate in this SEP, in total, of all the members of such groups, trades, or businesses. In addition, all eligible employees of all the members of such groups, trades, or businesses must be eligible to make elective deferrals to this SEP.)

D. Is a state or local government or a tax-exempt organization.

II. MAKING THE AGREEMENT

This SEP agreement is considered made when:

A. You have completed all blanks on the form; and

B. You have given all eligible employees copies of this SEP agreement and the "Notice to Employees" and, upon request by any eligible employee, this "Notice to Adopting Employer." (Any individual who, in the future, becomes eligible to participate in this SEP must be given the "Notice to Employees" upon becoming an eligible employee.)

III. EFFECTIVE DATE

This SEP agreement is effective upon adoption. No elective deferrals may be made by an employee on the basis of compensation that the employee received or had a right to receive before adoption of this agreement and execution by the employee of the deferral election.

IV. DEDUCTIBILITY OF CONTRIBUTIONS

You may deduct, subject to the otherwise applicable limits, those contributions made to a SEP. Contributions to the SEP are deductible for your taxable year with or within which the plan year of the SEP ends. Contributions made for a particular taxable year and contributed by the due date of your income tax return, including extensions, are deemed made in that taxable year.

V. ELECTIVE DEFERRALS

You may permit your employees to make elective deferrals through salary reduction or on the basis of bonuses that, at the employee's option, may be contributed to the SEP or received by the employee in cash during the year.

You are responsible for telling your employees how they may make, change, or terminate elective deferrals based on either salary reduction or cash bonuses. You must also provide a form on which they may make their deferrals. This requirement may be satisfied by use of the "Model SEP Deferral Form" provided for this purpose at the end of these instructions. You may instead use a form that sets forth, in a manner calculated to be understood by the average plan participant, the information contained in the Model SEP Deferral Form. Remember that no deferral election may be made with respect to compensation already received.

VI. SEP REQUIREMENTS

A. Elective deferrals may not be based on more than $200,000 of compensation, as adjusted in accordance with section 408(k)(8) of the Code for cost of living changes. Compensation is the employee's total compensation from the employer (determined without including the SEP- IRA contributions) and includes:

1. Amounts received for personal services actually performed (see section 1.219-1(c) of the Income Tax Regulations), and

2. Earned income defined under section 401(c)(2).

B. The maximum limit on the amount of compensation an employee may elect to defer under a SEP for a year is the lesser of 15% of the employee's compensation or the limitation under section 402(g) of the Code, as explained below.

Note: The deferral limit is 15 percent of compensation (less employer SEP-IRA contributions). Compute this amount using the following formula: Compensation (before subtracting employer SEP-IRA contributions) x 13.0435%.

C. If you make nonelective contributions to this SEP for a plan year, or maintain any other SEP or qualified plan to which contributions are made for such plan year, then contributions to all such SEPs and qualified plans may not exceed the lesser of $30,000 or 15% of compensation for any employee. If these limits are exceeded on behalf of any employee for a particular plan year, that employee's elective deferrals for that year must be reduced to the extent of the excess.

D. If you are a new employer who had no employees during the prior plan year, you will meet the limitation in section 408(k)(6)(B) of the Code (regarding no more than 25 eligible employees during the preceding year) if you had 25 or fewer employees throughout the first 30 days that you were in existence.

VII. EXCESS ELECTIVE DEFERRALS -- 402(g) LIMIT

Section 402(g) of the Code limits the maximum amount of compensation an employee may elect to defer under a SEP (and certain other arrangements) during the calendar year. This limit, which originally was $7,000, is indexed according to the cost of living. (The section 402(g) limit for 1991 is $8,475.) In addition, the limit may be increased if the employee makes elective deferrals to a salary reduction arrangement under section 403(b) of the Code. Amounts deferred for a year in excess of this limit are considered "excess elective deferrals" and are subject to the consequences described below.

The section 402(g) limit applies to the total elective deferrals the employee makes for the calendar year, from all employers, under the following arrangements:

A. Elective SEPs under section 408(k)(6) of the Code;

B. Cash or deferred arrangements under section 401(k) of the Code; and

C. Salary reduction arrangements under section 403(b) of the Code.

Thus, an employee may have excess elective deferrals even if the amount deferred under this SEP alone does not exceed the section 402(g) limit.

If an employee who elects to defer compensation under this SEP and any other SEP or arrangement has made excess elective deferrals for a calendar year, he or she must withdraw those excess elective deferrals by April 15 following the calendar year to which the deferrals relate. Those excess deferrals not withdrawn by April 15 will be subject to the IRA contribution limitations of sections 219 and 408 of the Code and thus may be considered an excess contribution to the employee's IRA. Such excess elective deferrals therefore may be subject to the six percent tax on excess contributions under section 4973.

Income on excess elective deferrals is includible in gross income in the year withdrawn from the IRA and must be withdrawn by April 15 following the calendar year to which the deferrals relate. Income withdrawn from the IRA after that date may be subject to the ten percent tax on early distributions under section 72(t) of the Code if the recipient is not 59-1/2.

VIII. EXCESS SEP CONTRIBUTIONS -- DEFERRAL PERCENTAGE LIMITATION

The amount each of your highly compensated employees may contribute to this elective deferral SEP is also restricted by the "deferral percentage limitation". This is a limitation based on the amount of money deferred, on average, by your non-highly compensated employees. Deferrals made by a highly compensated employee that exceed this deferral percentage limitation for a plan year are considered "excess SEP contributions" and must be removed from the employee's SEP-IRA, as discussed in more detail below.

The deferral percentage limitation for your highly compensated employees is computed by first averaging the "deferral percentages" (as defined below) for each eligible non-highly compensated employee for the plan year and then multiplying this result by 1.25. The deferral percentage for a plan year of any highly compensated employee eligible to participate in this SEP may not be more than the resulting product, the "deferral percentage limitation".

Only elective deferrals are included in this computation. Non- elective SEP contributions may not be included. The determination of the deferral percentage for any employee is to be made in accordance with section 408(k)(6) of the Code and should satisfy such other requirements as may be provided by the Secretary of the Treasury.

For purposes of making this computation, the calculation of the number and identity of highly compensated employees, and their deferral percentages, is made on the basis of the entire "affiliated employer."

In addition, for purposes of determining the deferral percentage of a highly compensated employee, the elective deferrals and compensation of the employee will also include the elective deferrals and compensation of any "family member". This special rule applies, however, only if the highly compensated employee is a 5% owner or is one of a group of the ten most highly compensated employees. The elective deferrals and compensation of family members used in this special rule do not count in computing the deferral percentages of individuals who do not fall into this group.

The following definitions apply for purposes of the deferral percentage computation:

A. "Deferral percentage" shall mean the ratio (expressed as a percentage) of an employee's elective deferrals for a year to the employee's compensation for that year. The deferral percentage of an employee who is eligible to make an elective deferral, but who does not make a deferral during the year, is zero.

B. "Affiliated employer" shall mean any corporation that is a member of a controlled group of corporations (as described in section 414(b) of the Code) that includes the employer; any trade or business (whether or not incorporated) that is under common control (as defined in section 414(c)) with the employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in section 414(m)) that includes the employer; and any other entity required to be aggregated with the employer pursuant to regulations under section 414(o).

C. "Family member" shall mean an individual who is related to a highly compensated employee as a spouse, or as a lineal ascendant (such as a parent or grandparent) or descendant (such as a child or grandchild) or spouse of either of those, in accordance with section 414(q) of the Code and the regulations thereunder.

D. "Highly compensated individual" shall mean an individual described in section 414(q) of the Code who, during the current or preceding year:

1. Was a 5% owner as defined in section 416(i)(1)(B)(i) of the Code;

2. Received compensation in excess of $50,000, as indexed according to the cost of living in accordance with section 414(q)(1), and was in the top-paid group (the top 20% of employees, by compensation);

3. Received compensation in excess of $75,000, as indexed according to the cost of living in accordance with section 414(q)(1); or

4. Was an officer and received compensation in excess of 50% of the dollar limit under section 415 of the Code for defined benefit plans. (No more than three employees need be taken into account under this rule. At least one officer, the highest-paid officer if no one else meets this test, however, must be taken into account.)

IX. EXCESS SEP CONTRIBUTIONS -- TAX CONSEQUENCES AND NOTIFICATION OF EMPLOYEES

You are responsible for notifying each affected employee, if any, within 2-1/2 months following the end of the plan year, of the amount of excess SEP contributions to that employee's SEP-IRA. Such excess SEP contributions are includible in the employee's gross income in the calendar year as of the earliest date that any elective deferrals by the employee during the plan year would have been received by the employee had he or she originally elected to receive the amounts in cash. However, if the excess SEP contributions (not including allocable income) total less than $100, then the excess contributions are includible in the employee's gross income in the calendar year of notification. Income allocable to the excess SEP contributions is includible in gross income in the year of withdrawal from the IRA.

If you fail to notify any of your affected employees within 2- 1/2 months following the end of the plan year of an excess SEP contribution, you must pay a tax equal to 10% of the excess SEP contribution. If you fail to notify your employees by the end of the plan year following the plan year in which the excess SEP contributions arose, the SEP no longer will be considered to meet the requirements of section 408(k)(6) of the Code. If the SEP no longer meets the requirements of section 408(k)(6), then any contribution to an employee's IRA will be subject to the IRA contribution limitations of sections 219 and 408 and thus may be considered an excess contribution to the employee's IRA.

Your notification to each affected employee of the excess SEP contributions must specifically state in a manner calculated to be understood by the average employee:

A. The amount of the excess SEP contributions attributable to that employee's elective deferrals;

B. The calendar year in which the excess SEP contributions are includible in gross income; and

C. That the employee must withdraw the excess SEP contributions (and allocable income) from the SEP-IRA by April 15 following the calendar year of notification by the employer. Those excess contributions not withdrawn by April 15 following the year of notification will be subject to the IRA contribution limitations of sections 219 and 408 of the Code for the preceding calendar year and thus may be considered an excess contribution to the employee's IRA. Such excess contributions may be subject to the six percent tax on excess contributions under section 4973. If income allocable to an excess SEP contribution is not withdrawn by April 15 following the calendar year of notification by the employer, the income may be subject to the ten percent tax on early distributions under section 72(t) when withdrawn.

For information on reporting excess SEP contributions, see Notice 87-77, 1987-2 C.B. 385, and Notice 88-33, 1988-1 C.B. 513, as modified by Notice 89-32, 1989-1 C.B. 671.

X. FAILURE TO SATISFY THE 50% TEST

If you discover, as of the end of any plan year, that more than half of your eligible employees have chosen not to make elective deferrals for that year, then all elective deferrals made by your employees for that plan year shall be considered "disallowed deferrals", i.e., IRA contributions that are not SEP-IRA contributions.

You must notify each affected employee, within 2-1/2 months following the end of the plan year to which the disallowed deferrals relate, that his or her deferrals are no longer considered SEP-IRA contributions. Such disallowed deferrals are includible in the employee's gross income in the calendar year as of the earliest date that any elective deferrals by the employee during the plan year would have been received by the employee had he or she originally elected to receive the amounts in cash. Income allocable to the disallowed deferrals is includible in the employee's gross income in the year of withdrawal from the IRA.

Your notification to each affected employee of the disallowed deferrals must specifically state in a manner calculated to be understood by the average employee:

A. The amount of the disallowed deferrals;

B. The calendar year in which the disallowed deferrals are includible in gross income; and

C. That the employee must withdraw the disallowed deferrals (and allocable income) from the SEP-IRA by April 15 following the calendar year of notification by the employer. Those disallowed deferrals not withdrawn by April 15 following the year of notification will be subject to the IRA contribution limitations of sections 219 and 408 of the Code and thus may be considered an excess contribution to the employee's IRA. These disallowed deferrals thus may be subject to the six percent tax on excess contributions under section 4973. If income allocable to a disallowed deferral is not withdrawn by April 15 following the calendar year of notification by the employer, the income may be subject to the ten percent tax on early distributions under section 72(t) when withdrawn.

Disallowed deferrals should be reported in the same manner as are excess SEP contributions.

XI. RESTRICTIONS ON WITHDRAWALS

Your employees may not withdraw or transfer from their SEP-IRAs any SEP contributions (or income on these contributions) attributable to elective deferrals made during a particular plan year until 2-1/2 months after the end of that plan year. If you choose to do so before this 2-1/2 month period has expired, however, you may notify your employees when the deferral percentage limitation test has been completed for a particular plan year and that this withdrawal restriction is thus no longer applicable. In general, any transfer or distribution made before expiration of the applicable 2-1/2 month period (or notification, if sooner) will be includible in the employee's gross income and may also be subject to a ten percent penalty tax for early withdrawal. This restriction does not apply to an employee's excess elective deferrals.

XII. TOP-HEAVY REQUIREMENTS

For purposes of determining whether a plan is top-heavy under section 416 of the Code, elective deferrals are considered employer contributions. Elective deferrals may not be used, however, to satisfy the minimum contribution requirement under section 416. Thus, in any year in which a "key employee" makes an elective deferral, this SEP is deemed top-heavy for purposes of section 416, and you are required to make the minimum top-heavy contribution to either the SEP-IRA or another SEP, or any other qualified plan, of each non-key employee eligible to participate in the SEP.

A "key employee" under section 416(i)(1) of the Code is any employee or former employee (and the beneficiaries of these employees) who, at any time during the "determination period", was:

A. An officer of the employer (if the employee's compensation exceeds 50% of the limit under section 415(b)(1)(A));

B. An owner of one of the ten largest interests in the employer (if the employee's compensation exceeds 100% of the limit under section 415(c)(1)(A));

C. A 5% owner of the employer, as defined in section 416(i)(1)(B)(i) of the Code; or

D. A 1% owner of the employer (if the employee has compensation in excess of $150,000).

The "determination period" is the current plan year and the four preceding years.

You must satisfy the minimum contribution requirement of section 416 by making the required contributions through this or another SEP or a qualified plan.

XIII. FOR MORE INFORMATION

To obtain more information concerning the rules governing this SEP, please contact: [NAME, ADDRESS, AND PHONE NUMBER OF PROTOTYPE SPONSOR].

MODEL SEP DEFERRAL FORM

I. Salary reduction deferral

Subject to the requirements of the Elective SEP of [INSERT NAME OF EMPLOYER], I authorize the following amount or percentage of my compensation to be withheld from each of my paychecks and contributed to my SEP-IRA:

a) ________ percent of my salary (not in excess of [INSERT PERCENTAGE]); or

b) ________ dollar amount (not in excess of [INSERT SPECIFIED DOLLAR AMOUNT]).

This salary reduction authorization shall remain in effect until I give a written modification or termination of its terms to my employer.

II. Cash bonus deferral

Subject to the requirements of the Elective SEP of [INSERT NAME OF EMPLOYER], I authorize the following amount to be contributed to my SEP-IRA rather than being paid to me in cash:

a) ________ dollar amount (not in excess of [INSERT SPECIFIED DOLLAR AMOUNT]).

III. Amount of deferral

I understand that the total amount I defer in any calendar year to this SEP may not exceed the lesser of:

a) 15% of my compensation (determined without including any SEP- IRA contributions); or

b) $8,475 (as adjusted for the cost of living).

IV. Commencement of deferral

The deferral election specified in either I. or II. above shall not become effective before:

a) ________ (specify a date no earlier than the first day of the first pay period beginning after this authorization.)

V. Distributions from SEP-IRAs

I understand that I should not withdraw or transfer any amounts from my SEP-IRA that are attributable to elective deferrals and income on elective deferrals for a particular plan year (except for excess elective deferrals) until 2-1/2 months after the end of the plan year or, if sooner, when my employer notifies me that the deferral percentage limitation test for that plan year has been completed. Any such amounts that I withdraw or transfer before this time will be includible in income for purposes of sections 72(t) and 408(d)(1) of the Code.

__________ ____________

I. SIMPLIFIED EMPLOYEE PENSION-DEFINED

A SEP is a retirement income arrangement. In this "elective" SEP, you may choose to defer compensation to your own Individual Retirement Account or Annuity ("IRA"). You may base these "elective deferrals" either on a salary reduction arrangement or on bonuses that, at your election, may be contributed to an IRA or received in cash. This type of elective SEP is available only to an employer with 25 or fewer eligible employees.

Your employer must provide you with a copy of the SEP agreement containing eligibility requirements and a description of the basis upon which contributions may be made.

All amounts contributed to your IRA belong to you, even after you quit working for your employer.

II. ELECTIVE DEFERRALS -- MAY BE DISALLOWED

You are not required to make elective deferrals to this SEP-IRA. However, if more than half of your employer's eligible employees choose not to make elective deferrals in a particular year, then no employee may participate in your employer's elective SEP for that year. If you make elective deferrals during a year in which this happens, then your deferrals for that year will be "disallowed", and the deferrals will be considered ordinary IRA contributions (which may be excess IRA contributions) rather than SEP-IRA contributions.

"Disallowed deferrals" and allocable income may be withdrawn, without penalty, until April 15 following the calendar year in which you are notified of the "disallowed deferrals". Amounts left in the IRA after that date will be subject to the same penalties discussed in Section VII below applicable to excess SEP contributions.

III. ELECTIVE DEFERRALS -- ANNUAL LIMITATION

The maximum amount that you may defer to this SEP for any calendar year is limited to the lesser of fifteen percent of compensation (determined without including the SEP-IRA contribution) or a dollar limit under section 402(g) of the Internal Revenue Code that originally was $7,000 (and is now subject to cost-of-living increases.)

The fifteen percent limit may be reduced if your employer also maintains a SEP to which non-elective contributions are made for a plan year, or any qualified plan to which contributions are made for such plan year. In that case, total contributions on your behalf to all such SEPs and qualified plans may not exceed the lesser of $30,000 or fifteen percent of your compensation. If these limits are exceeded, the amount you may elect to contribute to this SEP for the year will be correspondingly reduced.

The dollar limit under section 402(g) of the Code is an overall limit on the maximum amount that you may defer in each calendar year to all elective SEPs and cash or deferred arrangements under section 401(k) of the Code, regardless of how many employers you may have worked for during the year.

The section 402(g) limit is indexed according to the cost of living. In addition, the section 402(g) limit may be increased to $9,500 if you make salary reduction contributions under a section 403(b) tax-sheltered annuity arrangement.

If you are a highly compensated employee, there may be a further limit on the amount that you may contribute to a SEP-IRA for a particular year. This limit is calculated by your employer and is known as the "deferral percentage limitation". This deferral percentage limitation is based on a mathematical formula that limits the percentage of pay that highly compensated employees may elect to defer to a SEP-IRA. As discussed below, your employer will notify each highly compensated employee who has exceeded the deferral percentage limitation.

IV. ELECTIVE DEFERRALS -- TAX TREATMENT

The amount that you may elect to contribute to your SEP-IRA is excludible from gross income, subject to the limitations discussed above, and is not includible as taxable wages on Form W-2. However, these amounts are subject to FICA taxes.

V. ADDITIONAL TOP-HEAVY CONTRIBUTIONS

If you are not a "key employee", your employer must make an additional contribution to your SEP-IRA for a year in which the SEP is considered "top heavy". (Your employer will be able to tell you whether you are a key employee.) This additional contribution will not exceed three percent of your compensation. It may be less if your employer has already made a contribution to your account, and for certain other reasons.

VI. ELECTIVE DEFERRALS -- EXCESS AMOUNTS CONTRIBUTED

There are three different situations in which impermissible excess amounts are under the SEP-IRA.

The first way is when "excess elective deferrals" (i.e., amounts in excess of the section 402(g) limit) are made. You are responsible for calculating whether y0u have exceeded the section 402(g) limit in the calendar year. For 1991, the section 402(g) limit for contributions made to an elective SEP is $8,475.

The second way is when "excess SEP contributions" (i.e., amounts in excess of the deferral percentage limitation referred to above) are made by highly compensated employees. The employer is responsible for determining whether such an employee has made excess contributions.

The third way is when more than half of an employer's eligible employees choose not to make elective deferrals for a plan year. In that case, any elective deferrals made by any employees for that year are considered "disallowed deferrals", as discussed above. Your employer is also responsible for determining whether deferrals must be disallowed on this basis.

Excess elective deferrals are calculated on the basis of the calendar year. Excess SEP contributions and disallowed deferrals, however, are calculated on the basis of the SEP plan year, which may or may not be a calendar year.

VII. EXCESS ELECTIVE DEFERRALS -- HOW TO AVOID ADVERSE TAX CONSEQUENCES

Excess elective deferrals are includible in your gross income in the calendar year of deferral. Income on the excess elective deferrals is includible in the year of withdrawal from the IRA. You should withdraw excess elective deferrals under this SEP, and any allocable income, from your SEP-IRA by April 15 following the year to which the deferrals relate. These amounts may not be transferred or rolled over tax-free to another SEP-IRA.

If you fail to withdraw excess elective deferrals, and any allocable income, by April 15, the excess elective deferrals will be subject to the IRA contribution limitations of sections 219 and 408 of the Code and thus may be considered an excess contribution to your IRA. Such excess deferrals may be subject to a six percent excise tax for each year they remain in the SEP-IRA.

Income on excess elective deferrals is includible in your gross income in the year you withdraw it from your IRA and must be withdrawn by April 15 following the calendar year to which the deferrals relate. Income withdrawn from the IRA after that date may be subject to a ten percent tax on early distributions if you are not 59-1/2.

If you have both excess elective deferrals and excess SEP contributions (as described below), the amount of excess elective deferrals that you withdraw by April 15 will reduce any excess SEP contributions that must be withdrawn for the corresponding plan year.

VIII. EXCESS SEP CONTRIBUTIONS -- HOW TO AVOID ADVERSE TAX CONSEQUENCES

If you are a "highly compensated employee", your employer is responsible for notifying you if you have made any excess SEP contributions for a particular plan year. This notification should tell you the amount of the excess SEP contributions, the calendar year in which you must include these contributions in income, and that the contributions may be subject to penalties if you do not withdraw them from your IRA within the applicable time period.

Your employer should notify you of the excess SEP contributions within 2-1/2 months of the end of the plan year. Generally you must include the excess SEP contributions in income for the calendar year in which the original deferrals were made. This may require you to file an amended individual income tax return. However, an excess SEP contribution of less than $100 (not including earnings) is includible in the calendar year of notification. Income on these excess contributions is includible in your gross income when you withdraw it from your IRA.

You are responsible for withdrawing these excess PEP contributions (and earnings) from your IRA. You may withdraw these amounts, without penalty, until April 15 following the calendar year in which you were notified by your employer of the excess SEP contributions.

If you fail to withdraw the excess SEP contributions by April 15 following the calendar year of notification, the excess SEP contributions will be subject to the IRA contribution limitations of sections 219 and 408 of the Code and thus may be considered an excess contribution to your IRA. Thus, such excess SEP contributions may be subject to a six percent excise tax for each year they remain in your IRA.

If you do not withdraw the income on these excess SEP contributions by April 15 following the calendar year of notification by your employer, the income may be subject to a ten percent tax on early distributions if you are not 59-1/2 when you withdraw it.

IX. INCOME ALLOCABLE TO EXCESS AMOUNTS

The rules for determining and allocating income to excess elective deferrals, excess SEP contributions, and disallowed deferrals are the same as those governing regular IRA contributions. The trustee or custodian of your SEP-IRA will inform you of the income allocable to excess amounts.

X. AVAILABILITY OF IRA CONTRIBUTION DEDUCTION TO SEP PARTICIPANTS

In addition to any SEP amounts, you may contribute the lesser of $2,000 or 100% of compensation to an IRA. However, the amount that you may deduct is subject to various limitations. See Publication 590, "Individual Retirement Arrangements", for more specific information.

XI. SEP-IRA AMOUNTS -- ROLLOVER OR TRANSFER TO ANOTHER IRA

You may not withdraw or transfer from your SEP-IRA any SEP contributions (or income on these contributions) attributable to elective deferrals made during the plan year until 2-1/2 months after the end of the plan year or, if sooner, when your employer notifies you that the deferral percentage limitation test (described above) has been completed for that year. In general, any transfer or distribution made before this time will be includible in your gross income and may also be subject to a ten percent penalty tax for early withdrawal. You may, however, remove excess elective deferrals from your SEP-IRA before this time, but you may not roll over or transfer these amounts to another IRA.

After the restriction described in the preceding paragraph no longer applies, and with respect to contributions for a previous plan year, you may withdraw, or receive, funds from your SEP-IRA, and no more than 60 days later, place such funds in another IRA or SEP-IRA. This is called a "rollover" and may not be done without penalty more frequently than at one-year intervals. However, there are no restrictions on the number of times that you may make "transfers" if you arrange to have such funds transferred between the trustees so that you never have possession of the funds.

You may NOT, however, roll over or transfer excess elective deferrals, excess SEP contributions, or disallowed deferrals from your SEP-IRA to another IRA. These excess amounts may be reduced only by a distribution to you.

XII. FILING REQUIREMENTS

You do not need to file any additional forms with the IRS because of participation in the SEP.

XIII. EMPLOYER TO PROVIDE INFORMATION ON SEP-IRAS AND THE SEP AGREEMENT

Your employer must provide you with a copy of the executed SEP agreement, this Notice to Employees, the form you should use to defer amounts to the SEP, the notice of excess SEP contributions or disallowed deferrals (if applicable) and a statement for each taxable year showing any contribution to your SEP-IRA. Your employer must also notify you, if you are a highly compensated employee, when the deferral percentage limitation test has been completed for a plan year.

XIV. FINANCIAL INSTITUTION WHERE IRA IS ESTABLISHED TO PROVIDE INFORMATION

The financial institution must provide you with a disclosure statement that contains the following items of information in plain nontechnical language:

1. The statutory requirements that relate to the IRA;

2. The tax consequences that follow the exercise of various options and what those options are;

3. Participation eligibility rules, and rules on the deductibility and nondeductibility of retirement savings;

4. The circumstances and procedures under which you may revoke the IRA, including the name, address, and telephone number of the person designated to receive notice of revocation (this explanation must be prominently displayed at the beginning of the disclosure statement);

5. Explanations of when penalties may be assessed against you because of specified prohibited or penalized activities concerning the IRA; and

6. Financial disclosure information which:

a) Either projects value growth rates of the IRA under various contribution and retirement schedules, or describes the method of computing and allocating annual earnings and charges which may be assessed;

b) Describes whether, and for what period, the growth projections for the plan are guaranteed, or a statement of earnings rate and terms on which these projections are based; and

c) States the sales commission to be charged in each year expressed as a percentage of $1,000.

See Publication 590, "Individual Retirement Arrangements", which is available at most IRS offices, for a more complete explanation of the disclosure requirements.

In addition to the disclosure statement, the financial institution is required to provide you with a financial statement each year. It may be necessary to retain and refer to statements for more than one year in order to evaluate the investment performance of your IRA and in order that you will know how to report IRA distributions for tax purposes.