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SEPA Simplied Answer to Retirement Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Questions and Answers About the SEP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 An Explanation of the Morgan Stanley SEP Prototype Employer Agreement . . . . . . . . . . . . . . . 8 Disclosure Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Morgan Stanley SEP Employer Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Morgan Stanley SEP Prototype IRS Approval Letter No. C410166d* . . . . . . . . . . . . . . . . . . . . 17 How to Report Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Instructions for Completing the Contribution Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Contribution Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
*Morgan Stanley DW Inc. received a favorable opinion letter for the Simplified Employee Pension (SEP) plan on March 4, 2004. Morgan Stanley & Co. Incorporated, as the successor to Morgan Stanley DW Inc. will file for an updated opinion letter to reflect the change in prototype sponsor name and employer identification number. You will be furnished with a copy of the letter once it is received. Morgan Stanley and its Financial Advisors do not provide tax or legal advice, are not duciaries (under ERISA, the Internal Revenue Service or otherwise) with respect to the services or activities described herein, and this material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are urged to consult their tax or legal adviser before engaging in any transaction involving SEP-IRAs, IRAs or other tax advantaged investment vehicles. Investments and services are offered through Morgan Stanley & Co. Incorporated, member SIPC.
receives the same $10,000 as current compensation, pays approximately $4,000 or 40% in taxes leaving $6,000 to invest and pays a tax of 40% annually on the 8% return, a fund of $403,700*** would be accumulated by the time the individual reaches age 60. Even if all the individuals SEP IRA assets were taxed at 40% when withdrawn, the SEP would have $330,375*** more than the fund accumulated without the benet of a SEP. The Advantage of a Tax-Deferred SEP ($000s) A Hypothetical Illustration
$1,225
$1,223,459
$1,019
$815
$611
$407
$403,700
$203
10
15 Years
20
25
30
Tax-deferred accumulations in IRAs are subject to income taxation upon withdrawal. The amount actually received by the individual in the above example will be the amount accumulated reduced by Federal, state and local income taxes (if applicable) and may be reduced by a 10% Federal penalty tax if the individual takes a withdrawal before attaining age 5912. This chart is for illustrative purposes only and does not represent any specic investment. No specic rate of return is guaranteed and assets are not insured against market losses. All dollar amounts have been rounded off for illustrative purposes. Individual results will vary.
Most employers, whether self-employed individuals, owners of unincorporated businesses, partnerships, corporations, or S corporations, are eligible to adopt a SEP. Under a SEP, each Eligible Employee will adopt his or her own Individual Retirement Account (IRA) to which the employer may contribute each year. This IRA is sometimes referred to as a SEP IRA. Consequently, selecting the right SEP IRA is an important decision for you and your employees.
* Subject to cost of living adjustments by the U.S. Treasury. ** Funds from your SEP account will be taxed as ordinary income when you take withdrawals. Distributions taken before age 59 may also be subject to a 10% premature distribution tax penalty.
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*** All dollar amounts have been rounded off for illustrative purposes.
The Morgan Stanley SEP features the Morgan Stanley IRA. The IRA permits each individual to direct his or her own investments into stocks, bonds, certain limited partnerships, certain mutual funds, certicates of deposit, bank deposits and certain covered option strategies. Not all Eligible Employees need to elect the Morgan Stanley IRA as a SEP IRA in order for you to open a Morgan Stanley SEP. However, when employees do elect the Morgan Stanley IRA, your plan administration is further simplied. You can:
Streamline administration by sending one contribution check for all of your employees SEP IRAs; Permit maximum investment exibility for the employees IRAs; and Benet from the personal attention of a professionally trained Morgan Stanley Financial Advisor.
Allow employees to direct the investment of their own SEP IRA. With the Morgan Stanley IRA, each individual can decide upon investments such as stocks, bonds, certain mutual funds, certificates of deposit, bank deposits, certain annuities and certain covered option strategies. Each individual decides what investment to make, how much to invest in any of one or more types of investments and when to buy or sell his or her SEP IRA investments. The opportunity to change investment strategies and diversify a portfolio can help increase each individuals growth opportunities. In addition, each employee who selects a Morgan Stanley IRA will receive the personal attention of a professionally trained Morgan Stanley Financial Advisor. Benet from competitive pricing and ease of administration. For SEP plans, Morgan Stanleys policy is as follows: Each IRA account established by your employees will be charged a fee for annual administration. Also, there is a termination fee for each terminated Morgan Stanley IRA account. However, termination fees are not charged in a year in which you attain age 59 or over, or following your disability or death. A transfer fee will be imposed for accounts transferred from Morgan Stanley to another Financial Institution. In the event that both fees apply, only the transfer fee will be assessed. Normal brokerage commissions will be charged for purchases and sales within the SEP IRA account. There are no fees related to asset size or number of transactions.*
Ask your Morgan Stanley Financial Advisor for more information about the Morgan Stanley IRA.
Easy establishment
A SEP plan is an agreement to make SEP contributions to all Eligible Employees IRAs. Therefore, a SEP normally does not involve costly legal or pension administrative fees. Establishing a Morgan Stanley SEP involves:
Completing the Morgan Stanley SEP Employer Agreement; Giving copies of the completed and signed Employer Agreement and accompanying Disclosure Information to your Eligible Employees; Having each employee establish a SEP IRA; and Making SEP contributions to each eligible employees SEP IRA.
Send only one contribution check to Morgan Stanley for all Eligible Employees IRA accounts, using the Contribution Sheet on page 19. This saves you time because you avoid making SEP contributions to several separate institutions.
Note: SEP contributions will be treated as having been made by the last day of the employers taxable year if the SEP Adoption Agreement is executed and SEP contributions are made on or before the due date including extensions, of the employers Federal income tax return for the year.
* Asset-based and transaction-based fees may be available for eligible account owners who choose to enroll in certain programs offered by Morgan Stanley. Ask your Financial Advisor for information.
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Has performed services for the recipient (or for the recipient and related persons) substantially full time for at least one year, and Performs services under the primary direction or control of the recipient.
If you are an employera self-employed individual, sole proprietor, partnership (partners as individuals cannot establish individual plansthe partnership is the employer) or corporationyou can establish a SEP for yourself and your Eligible Employees. A SEP is most appropriate for employers with a small number of employees.
Must all employees be covered by the SEP?
Generally, all leased employees who meet the eligibility requirements must be included in the SEP unless they are covered by a safe harbor plan maintained by the leasing organization. If you employ leased employees you should consult with your tax advisor before establishing a SEP or any other retirement plan.
Establishment date
What is the deadline for establishing a SEP?
An employer must cover all employees except for employees who have not attained age 21, have not worked for the employer in at least three of the past ve years, are nonresident aliens or are members of a collective bargaining unit. In addition, the employer must include employees of any corporations, trades or businesses under common control or afliated with the employer as dened by Internal Revenue Code sections 414(b), (c), (m) and (o) and leased employees (see next question) required to be treated as employees under Code section 414(n). Contributions must be made for all Eligible Employees who earn at least $500 during a year (subject to cost of living adjustments). An employer may choose to make the eligibility requirements less restrictive, such as including employees of any age or requiring less than three years of service. All employees (including the owner) must meet all eligibility requirements that are established. For example, if the owner has only worked in the business for one year, an eligibility requirement greater than one year would exclude the owner. When an employer selects the eligibility requirements, it is important to remember that every Eligible Employee must receive a SEP contribution even if an Eligible Employee is not employed on the date the actual contribution is made.
Who is considered a leased employee?
The SEP may be established for any taxable year by the employers tax ling due date, including extensions, for that year.
Contributions
How much may be contributed to the SEP?
The overall maximum SEP contribution may not exceed 25% of compensation up to a maximum of $45,000 for 2007 ($44,000 for 2006; $42,000 for 2005)* per participant. The compensation used to determine this limit may not exceed an Internal Revenue Code limit of $225,000 for 2007 ($220,000 for 2006; $210,000 for 2005).* If other qualied employee benet plans were ever maintained, it may be necessary to consult with a professional tax advisor to determine the maximum amount that may be contributed to the SEP each year.
Is there a limit on the amount of compensation or earned income which may be used to calculate SEP contributions?
Yes. No amount of compensation or net earnings in excess of $225,000 for 2007 ($220,000 for 2006; $210,000 for 2005)* may be taken into account when calculating SEP contributions.
Is the SEP subject to the top heavy rules?
A leased employee is a person who is not the common-law employee of a recipient but who:
Provides services to the recipient under an agreement between the recipient and a leasing organization,
Yes. All prototype SEP plans including the Morgan Stanley SEP are deemed to be top heavy within the meaning of Internal Revenue Code section 416. Under the top heavy rules an employer must make a required minimum contribution to the accounts of all non-key Eligible
Employees. The Morgan Stanley SEP contribution formulas are designed to assure that the top heavy minimum required contribution will be made.
How are contributions made to the SEP?
One or more contributions may be made during the year. However, any contribution should be prorated among all plan participants so that contributions are not deemed to be discriminatory at any time. Contributions may be made up to the tax-ling due date of the business, including extensions. All employer SEP contributions must be made in cash.
Can contributions to the Morgan Stanley SEP be integrated with Social Security?
SEP contributions made by a self-employed individual may not exceed the lesser of $45,000 for 2007 ($44,000 for 2006; $42,000 for 2005)* or 25% of the individuals net earned income. Net earned income is the income earned by the individual from personal services rendered to or on behalf of the business adopting the SEP, less deductions from income (including 50% of the selfemployment tax) and less the amount of contributions to the SEP. To calculate the actual SEP contribution, the self-employed individual must rst calculate his or her net earned income without taking the SEP contribution into consideration and then use the following formula:
Contribution = Net Earnings x Contribution Percentage ----------------------------------------------------------------------------------------------1 + Contribution Percentage
Yes, integrating contributions with Social Security can result in a contribution equal to a higher percentage of compensation for employees who earn over the Social Security Taxable Wage Base. You may integrate contributions to your Morgan Stanley SEP by selecting box 2 under the Contributions section on the Morgan Stanley Simplied Employee Pension Plan Employer Agreement and lling in the percentage of the Taxable Wage Base to be used as the Integration Level.
Once the SEP is adopted, can the contribution formula be changed?
If the self-employed individual wants to make the maximum allowable contribution, he or she may calculate this amount by multiplying his or her net earnings by 20% (.20). Example: 25% contribution based on $100,000 selfemployment income.
Contribution = $100,000 x 25% 25,000 ------------------------------------- = ---------------------- = $20,000 1 + .25 1.25
Yes, but employers who want to change from an integrated to a uniform contribution formula, or vice versa, must execute a new adoption agreement and give copies to all Eligible Employees every time such a change is made. Employers who want to change the Integration Level used to make integrated contributions must also execute and distribute a new adoption agreement. Annual contributions to the SEP are discretionary. Every year the employer decides whether to contribute and the amount of the contribution. If the employer has elected a uniform contribution formula, the same percentage rate must be used to calculate the contribution for every Eligible Employee. The percentage selected may be different every year. If the employer uses an integrated formula the total amount being contributed may be different every year but the method of allocating this amount among the SEP IRA accounts of Eligible Employees may only be done in accordance with the formula elected by the employer in the adoption agreement.
The $20,000 contribution is deducted from the $100,000 net earnings to determine the earned income gure.
Net Earnings Contribution Earned Income = = = 100,000 -- 20,000 -------------------80,000
Distributions
What are the rules concerning distributions from the SEP?
Any employee who has eligible earnings and has met the plans eligibility requirements is entitled to have a contribution made on his or her behalf.
When is the employee vested in the SEP?
Contributions are immediately 100% vested when made under the SEP.
Can employees make contributions to their SEP IRA accounts?
Yes. Employees under age 70 may make annual IRA contributions to their SEP IRA account. The deductibility of such contributions would be subject to Adjusted Gross Income limits. More information is available in the Morgan Stanley IRA Disclosure Statement found in the IRA Adoption Booklet.
Can employees make contributions to Roth IRA accounts?
Employees may take distributions from their SEP IRA accounts under the same distribution rules that apply to standard IRA accounts. These distribution rules are explained in the Morgan Stanley Traditional IRA account Opening Kit. In general, employees may receive distributions without penalty only after attaining age 59 but must start taking distributions by April 1st following the year they reach age 70 , regardless of whether they have stopped working. Generally, an employee is subject to a 10% premature distribution tax if distributions begin prior to age 59 except in the case of death, disability, a 72(t) distribution in the form of a series of substantially equal periodic payments based on the life expectancy of the participant (or the joint lives of the participant and the beneciary), a transfer of all or a portion of the SEP IRA to a spouse or former spouse under a court order incident to a divorce, payment of medical expenses in excess of 7.5% of adjusted gross income, payment of medical insurance premiums if an individual has been receiving unemployment insurance benets for at least 12 weeks (or would have been eligible for such benets but for the fact that the individual was self-employed), distributions for qualied rst time home purchases (up to a $10,000 lifetime limit) or distributions for qualied higher education expenses.
Individuals who are eligible to establish and fund a Roth IRA do not lose their Roth IRA eligibility solely because they participate in a SEP IRA. Roth IRA contributions must be made to a separate Roth IRA account not to the SEP IRA account. Additional information is available in the Morgan Stanley Roth IRA Disclosure Statement found in the Morgan Stanley IRA Adoption Booklet.
Administration
How do I inform my employees of the SEP?
Investments
What investments are permitted under the Morgan Stanley SEP IRA?
Provide each Eligible Employee with a copy of the completed and signed Employer Agreement and a copy of the Disclosure Information found on pages 9 through 12 of this booklet.
Publicly traded securities for which there is an active recognized market; Covered call writing (the IRA must own the underlying securities);* Purchasing of protective puts (the IRA must own the underlying securities);* Mutual funds with which Morgan Stanley has a sales agreement; Certicates of Deposit; Nonqualied annuities sponsored by Morgan Stanley; Unit investment trusts; Money market funds;** Certain coins and bullion; and Bank deposits.
Each employee will receive IRA statements from the nancial institution selected to receive the SEP contribution. Those employees who establish a Morgan Stanley IRA receive quarterly statements. A monthly statement will be sent for any month in which there is activity.
Who sets up my employees IRA accounts?
You should instruct each Eligible Employee to set up an Individual Retirement Account for SEP contributions with a qualied IRA custodian or trustee and report the name and address of the IRA custodian or trustee, as well as account number, to you. You may require that the employee set up a SEP IRA which you select, or choose a SEP IRA from several you have selected. If so, you must give each Eligible Employee a clear written explanation of the terms of the SEP IRA(s) you select. The explanation must include information about the terms of the IRAs, such as rates of return if specied under the program, permissible investment, administrative fees, and any restrictions on a participants ability to transfer or withdraw funds from the IRA. Please note that if you do restrict the ability of the employee to take distributions from his or her IRA, you may be required to le annual reports with the Department of Labor and the IRS. If you wish to select the Morgan Stanley IRA, your Financial Advisor can supply informational material for you to distribute to all employees, in which the fee information is included. If you endorse a specic IRA in addition to Morgan Stanleys IRA, you may need to obtain additional disclosure information for employees regarding those IRAs.
Real property; Real estate trust deeds; Options other than as described above under Permitted Investments; Collectibles (i.e., gems, coins (except as described above), precious metals, antiques, etc.); Margin transactions; Short sales of securities; Life insurance; and Securities which Morgan Stanley may not hold as Custodian (ask your Financial Advisor for details).
On a daily basis, all uninvested dollars in Morgan Stanley SEP IRA accounts will be automatically deposited in accounts with Morgan Stanley Bank or any other banking afliate of Morgan Stanley, in any other sweep investment vehicle specied either in an agreement applicable to your account, or in a sweep investment vehicle otherwise made available and disclosed to you.
* Options are not suitable for all investors. If you would like to discuss if covered call writing or purchasing protective puts may be appropriate as part of your investment strategy, or if you would like to obtain a detailed brochure entitled Characteristics and Risks of Standardized Options, please contact your Morgan Stanley Financial Advisor.
** An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.
Morgan Stanleys SEP IRA provides for an individual selfdirected account for each employee. Therefore, employees direct the investment of their own accounts. This feature reduces the employers duciary responsibility.
What insurance protection is available for the assets in a Morgan Stanley SEP IRA?
Securities and cash held in Morgan Stanley accounts are protected up to their full net equity value by a combination of coverage provided by the Securities Investor Protection Corporation (SIPC), a nonprot organization created by an Act of Congress and additional protection purchased from a private insurer by Morgan Stanley (excess coverage). SIPC protects up to $500,000 of your securities, of which up to $100,000 may be uninvested cash. Excess coverage provides additional protection up to the full net equity value of each account including unlimited coverage for cash. SIPC and excess coverage apply only to securities and cash in the exclusive possession and control of Morgan Stanley. Mutual funds, including money market funds that may be redeemed only through Morgan Stanley, are covered. Securities, including certain mutual funds, annuities and limited partnerships, which may be redeemed or liquidated by direct contact with the issuer, carrier, distributor, or their agents are generally not covered by SIPC or excess coverage. The asset protection offered by SIPC and the excess coverage do not protect against losses of value due to market uctuations. In addition, bank deposits are not covered by SIPC or the excess coverage. However, for IRAs, such bank deposits are eligible for deposit insurance by the Federal Deposit Insurance Corporation (FDIC), generally up to $250,000 per sweep bank ($500,000 in the aggregate), in accordance with FDIC rules. If you would like more information, please contact a Morgan Stanley Financial Advisor. Additional information about SIPC and asset protection may also be found at www.sipc.org. Additional information about FDIC protection may be found in the Bank Deposit Program Disclosure Statement and may also be found at www.fdic.gov.
Disclosure Information Under the Morgan Stanley Simplied Employee Pension Plan
The Morgan Stanley Simplied Employee Pension Plan, or SEP (a prototype plan sponsored by Morgan Stanley), is an arrangement through which employers can make contributions toward their employees retirement security without becoming involved in more complex retirement plans. Under the SEP, an employer makes contributions directly to each employees Individual Retirement Account (IRA). The IRA to which the employer contributes is referred to as a SEP IRA. An Employer who adopts the SEP is not statutorily required to make any contributions to the SEP IRAs of Eligible Employees. However, if any contribution is made, the contributions may not discriminate in favor of highly compensated employees. Morgan Stanley will provide a statement to each participant that shows the amount of the SEP contribution. If an Eligible Employee makes less than $500 (subject to cost of living adjustments) in the year for which the contribution is made, the employer need not make a SEP contribution for that employee. The participation requirements that the employer may impose cannot be more restrictive than the law provides, but they can be less restrictive. The law provides that all employees who are at least 21 years old and who have worked for the employer for some period of time (however short) in any three of the immediately preceding ve years, are eligible to receive SEP contributions. If you are a member of an afliated service group, a controlled group of corporations, or trades or businesses under common control, work includes work performed for any period of time for any other member of such group, trades, or businesses. Non-resident aliens without U.S. income and unionized employees who have already negotiated with respect to retirement benets may be excluded from participation. This information and the following Questions and Answers should provide a basic understanding of what the Morgan Stanley SEP is and how it works. An employee who has unresolved questions concerning SEPs should call the Federal tax information number, or the toll free number shown in the white pages of the local telephone directory.
Do not detach. Keep in this booklet for your records. Make copies for all eligible employees.
It is possible that for a given year no employer contribution will be made. If you also maintain a salary reduction SEP, contributions to the two SEPs together may not exceed the smaller of $40,000 (subject to cost of living adjustments by the U.S. Treasury for future years; $45,000 for 2007) or 25% of compensation for any employee.
7. Are there any restrictions on the IRA account in which my SEP contributions are deposited?
Under the SEP, contributions can be made to any Traditional IRA account selected by the employer but may not be made to a Roth IRA, a SIMPLE IRA, or an Education Savings Account.
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Do not detach. Keep in this booklet for your records. Make copies for all eligible employees.
12. What happens if too much is contributed to my SEP IRA in one year?
Any contribution that is more than the yearly limitation may be withdrawn without penalty by the due date (including extensions) for ling your tax return (normally April 15th), but includible in your gross income. Excess contributions left in your SEP IRA account after that time are subject to a 6% excise tax and may also be taxed as premature withdrawals (see Q&A 10).
Do not detach. Keep in this booklet for your records. Make copies for all eligible employees.
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14. Do I need to le any additional forms with the IRS because I participate in a SEP?
No.
(6) nancial disclosure information which: (a) either projects value growth rates of your 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 the earnings rate and terms on which the projection is based; and (c) states the sales commission to be charged in each year expressed as a percentage of $1,000. See IRS Publication 590, Individual Retirement Arrangements (IRAs) available at most IRS ofces, for a more complete explanation of the disclosure requirements. In addition to this disclosure statement, the nancial institution is required to provide you with a nancial statement each year. It may be necessary to retain and refer to these statements for more than one year in order to evaluate the investment performance of the IRA and to report IRA distributions for tax purposes. Your Morgan Stanley Financial Advisor will be glad to answer any further questions you may have about the Morgan Stanley SEP or the IRA. However, your tax advisor or attorney should be consulted as to the specic tax consequences or benets of a SEP for you or your business.
15. Is my employer required to provide me with information about SEP IRAs and the Morgan Stanley SEP Agreement?
Yes, your employer must provide you with a copy of the executed Morgan Stanley SEP agreement, this disclosure statement and provide a statement each year showing any contribution to your SEP IRA.
16. Is the nancial institution where I establish my IRA also required to provide me with information?
Yes, it must provide you with a disclosure statement which contains the following items of information in plain, nontechnical language: (1) the statutory requirements which relate to your IRA; (2) the tax consequences which follow the exercise of various options and what those options are; (3) eligibility rules and rules on the deductibility and nondeductibility of retirement savings; (4) the circumstances and procedures under which you may revoke your 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) explanation of when penalties may be assessed against you because of prohibited or penalized activities concerning your IRA; and
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Do not detach. Keep in this booklet for your records. Make copies for all eligible employees.
and, leased employees who are required to be treated as employees of the Employer by Code section 414(n), who have: 3. Reached age:
(21 or less)
4.
Performed service for the Employer during _________ out of ve immediately preceding years; and
(0-3)
Earned at least $450, adjusted annually by the Treasury, in the current year; but excluding [check box to exclude certain employees]
Address
6.
hereby adopts this Morgan Stanley Simplied Employee Pension Plan (the SEP or the plan) in accordance with Section 408(k) of the Internal Revenue Code (the Code).
Employees whose retirement benets have been the subject of good faith collective bargaining with the Employer. Nonresident alien employees who have received no earned income from the Employer which constitutes earned income from sources within the United States.
7.
A. Predecessor Employer
For eligibility purposes, service with predecessor employer(s) will not be considered unless this box is checked.
B. Eligibility
The Employer agrees to make contributions for each [check box 1 or 2 and complete lines 3 and 4]: l. 2.
(Note to Employer: An Employer may elect to use either the calendar year or its taxable (scal) year for participation and contribution/allocation purposes. The year selected by the Employer for these purposes is referred to in the rest of this adoption agreement as the Plan Year. If the Employer already maintains a SEP and desires to change to a Plan Year other than a calendar year, an employee who has any service during the short Plan Year must be given credit for that service in determining whether the employee has performed service in three of the last ve years. Such an employee must also receive a contribution for the short Plan Year if the employee would have been entitled to a contribution for the calendar year in which the short Plan Year begins if there had been no change.)
C. Compensation
As used in this plan, Compensation shall mean as follows: in which the Employer so elects to the Individual Retirement Account (IRA) of all employees including all employees of corporations, trades or businesses which are controlled by or under common control with the Employer as described in Code sections 414(b), (c) or (o); employees of corporations, trades or businesses which are in an afliated service group with the Employer as described in Code section 414(m); 1. For any self-employed individual covered by the plan, Compensation means earned income actually paid or made available to the self-employed individual during the Plan Year. For all other employees, Compensation means wages as dened by Code section 3401(a) and all other payments to the employee by his or her employer
2.
Do not detach. Keep in this booklet for your records. Make copies for all eligible employees.
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in the course of the employers trade or business which are required by Code sections 6041, 6051, and 6052 to be reported as Wages, Tips and Other Compensation on IRS Form W-2, provided such wages or other payments are actually paid or made available to the employee during the Plan Year. Compensation, for plan purposes, must be determined without regard to any rules under Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Section 3401(a)(2)). 3. Compensationshall [check one] include / exclude any amount which is contributed on behalf of the employee by the employer pursuant to a salary reduction agreement and which is not includible in the employees gross income under Code sections 125 [cafeteria plans], 132(f) [transit plans], 402(a)(8) [401(k) plans], 402(h) [SEPs and SAR-SEPs], 403(b) [tax exempt organization plans] or 457 [governmental plans]. Compensation taken into account for an employee for any Plan Year shall not exceed the limit set forth in Code section 401(a)(17) and regulations promulgated thereunder (the Section 401(a)(17) Limit), adjusted by the Treasury in accordance with Code section 408(k)(8), in effect for the calendar year in which the Plan Year begins. For Plan Years beginning on or after January 1, 2002, the Section 410(a)(17) Limit shall be $200,000, subject to adjustment by the Treasury. In the event of a short Plan Year (less than twelve (12) months), the annual compensation limit will be the limit for the calendar year in which the short Plan Year begins multiplied by the ratio obtained by dividing the number of full months in the short Plan Year by twelve (12). For purposes of the $450 threshold used to determine whether an employee is eligible for a contribution, Compensation shall have the meaning given to it in Code section 414(q)(4). Code section 415 Safe-Harbor Compensation. Compensation is dened as wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the employer maintaining
the SEP to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salespersons, compensation for services on the basis of a percentage of prots, commissions on insurance premiums, tips, bonuses, fringe benets, and reimbursements or other expense allowances under a non accountable plan (as described in Treasury Regulations section 1.61-2(c)), and excluding the following: (a) Employer contributions to a plan of deferred compensation which are not includible in the employees gross income for the taxable year in which contributed, or employer contributions under a SEP, or any distributions from a plan of deferred compensation; (b) Amounts realized from the exercise of a non qualied stock option, or when restricted stock (or property) held by the employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (c) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualied stock option; and (d) Other amounts which received special tax benets, such as premiums for group-term life insurance (but only to the extent the premiums are not includible in the gross income of the employee). 7. Except where specically stated otherwise in this plan, an employees Compensation shall include any elective deferral described in Code section 402(g)(3) or any amount that is contributed by the employer at the election of the employee and that is not includible in the gross income of the employee under Code sections 125, 132(f)(4) or 457.
4.
5.
D. Contributions
Each employee who satises the eligibility requirements of section B above will share in an allocation as determined under this section D. The Employer agrees that contributions made under this SEP will be made as follows: [check box 1 or box 2 and select an Integration Level] 1.
6.
Uniform Formula The Employer will allocate contributions for a Plan Year, if any, to the IRA accounts of Eligible Employees in an amount equal to a uniform
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Do not detach. Keep in this booklet for your records. Make copies for all eligible employees.
percentage of each employees Compensation for the Plan Year. In no event will the contribution allocated to an employees IRA by this formula exceed 25% of the employees Compensation for the Plan Year or $40,000, as adjusted by the U.S. Treasury (or such other maximum amount as may be permitted), whichever is less. For purposes of the 25% limitation described in the preceding sentence, an employees compensation does not include any elective deferral described in Code section 402(g)(3) or any amount that is contributed by the employer at the election of the employee and that is not includible in the gross income of the employee under Code sections 125, 132(f)(4) or 457. 2.
pay FICA taxes for Social Security Old Age, Survivor and Disability Insurance benets). Maximum Disparity Rate is determined using the following table: Integration Level
(as percentage of Taxable Wage Base)
100% More than 80% but less than 100% More than 20% (but not less than $10,001) and not more than 80% 20% (or $10,000, if greater) or less
2.7%
Integrated Formula The Employer shall determine the total amount of contributions, if any, to make for a year. The Employer contributions will then be allocated among the IRA accounts of Eligible Employees using the formula set forth in Steps One, Two, Three and Four below. In no event will the contribution allocated to an employees IRA by this formula exceed 25% of the employees Compensation for the Plan or $40,000, as adjusted by the U.S. Treasury (or such other maximum amount as may be permitted), whichever is less. For purposes of the 25% limitation described in the preceding sentence, an employees compensation does not include any elective deferral described in Code section 402(g)(3) or any amount that is contributed by the employer at the election of the employee and that is not includible in the gross income of the employee under Code sections 125, 132(f)(4) or 457.
Step One: Contributions will be allocated to each Eligible Employees IRA in the ratio that each Eligible Employees Compensation for the Plan Year bears to all Eligible Employees Compensation, but not in excess of 3% of each Eligible Employees Compensation. Step Two: Any contributions not allocated by Step One will be allocated to each Eligible Employees IRA in the ratio that each Eligible Employees Excess Compensation for the year bears to the Excess Compensation of all Eligible Employees, but not in excess of 3% of each Eligible Employees Excess Compensation. For purposes of this Step Two, in the case of any employee who has exceeded the cumulative permitted disparity limit described below, such employees total compensation for the calendar year will be taken into account. Step Three: Any contributions not allocated by Steps One and Two will be allocated to each Eligible Employees IRA in the ratio that each Eligible Employees compensation plus Excess Compensation for the Plan Year bears to the sum of all Eligible Employees Compensation plus Excess Compensation but not in excess of the Maximum Disparity Rate. For purposes of this Step Three, in the case of any employee who has exceeded the cumulative permitted disparity limit described below, 2 times such employees total compensation for the calendar year will be taken into account. Step Four: Any contributions not allocated by Steps One, Two and Three will be allocated to each Eligible Employees IRA in the ratio that each Eligible Employees Compensation bears to all Eligible Employees Compensation for the Plan Year.
The following denitions must be used when applying this integration formula: Excess Compensation is Compensation above the Integration Level. Integration Level is _________% of the Taxable Wage Base
(1-100)
in effect on the rst day of the Plan Year for which contributions are made. Taxable Wage Base means the contribution and benet base in effect under section 230 of the Social Security Act at the beginning of the Plan Year (i.e., the maximum amount of employee compensation on which the employer must
Do not detach. Keep in this booklet for your records. Make copies for all eligible employees.
15
Overall permitted disparity limits: Annual overall permitted disparity limit: Notwithstanding the preceding paragraphs, for any calendar year this SEP benets any employee who benets under another SEP or qualied plan described in Code section 401(a) maintained by the employer that provides for permitted disparity (or imputes disparity), employer contributions will be allocated to each employees IRA in the ratio that the employees total compensation for the calendar year bears to all employees total compensation for that year. Cumulative permitted disparity limit: Effective for calendar years beginning on or after January 1, 1995, the cumulative permitted disparity limit for an employee is 35 total cumulative permitted disparity years. Total cumulative permitted disparity years means the number of years credited to the employee for allocation or accrual purposes under this SEP or any other SEP or any qualied plan described in Code section 401(a) (whether or not terminated) ever maintained by the employer. For purposes of determining the employees cumulative permitted disparity limit, all years ending in the same calendar year are treated as the same year. If the employee has not beneted under a dened benet or target benet plan for any year beginning on or after January 1, 1994, the employee has no cumulative permitted disparity limit. Whichever allocation formula is used, the Employer shall communicate to all Eligible Employees, in writing, the amount, if any, of the contribution for each Plan Year, and contributions shall be made on behalf of each Eligible Employee to the custodian of the employees IRA on or before the employers tax ling date (including extensions) for the Plan Year for which the contribution is made.
2.
3.
G. Signatures
Signed:
Employer: Print or Type Name
Date:
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Do not detach. Keep in this booklet for your records. Make copies for all eligible employees.
17
Partnerships
SEP contributions made by a partnership are reported on page 1 of Form 1065 under Deductions. The total amount contributed for all employees is entered on the line Retirement Plans, etc. The total contribution made on behalf of the partners is entered on the line Payments for Partners to Simplied Employee Pension.
Corporations
The total amount of SEP contributions made for all employees is reported on page 1 of Form 1120. The SEP contribution is entered on the line Pension, protsharing, etc. plans under Deductions. For tax option corporations or S Corporations, the total SEP contribution is reported on page 1 of Form 1120S on the line Pension, prot-sharing, etc. plans. Your Morgan Stanley Financial Advisor will be glad to answer any further questions you may have about the Morgan Stanley SEP or the IRA. However, your tax advisor or attorney should be consulted as to the specic tax consequences and benets of a SEP for your business.
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City
State
Zip
Business Telephone
Attention Financial Advisor: Please send a copy of the completed form with account numbers back to the employer.
Subtotal Total from reverse and additional sheets, if any Total Contributions Fee check must be included when new accounts are established. Please provide separate contribution and fee checks payable to Morgan Stanley. Total Number of New Accounts x Annual Fee Total Fees Remitted
$ $ $
$50.00 $
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Employee Name
IRA Account #
Contribution Amount
Subtotal $
20
Investments and services are offered through Morgan Stanley & Co. Incorporated, member SIPC.
NYCS 5624696 09/07
37431 09/07