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SEP Contribution after termination of SEP


Guest Taxman
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Long time reader, first time poster. This is a great site. I believe I know the answer to my own question, just wanted to run it by people who see this stuff more than me. I have a client that had a calender year SEP up until August 2001, then ixnaed that and adopted a 401k profit sharing plan. SEP had not been funded for 2001. Client wants to make a contribution to that terminated SEP, mostly because the employees who are now in the 401k plan were not in the SEP due to eligibility requirements (the owners of this S corp want everything going to them)...

Anyhoos, although the deadline for making a deductible contribution for a SEP extends to the due date of the tax return (so conceivably you could have until September 15, 2002), I believe it's implicit that a SEP actually exist at the time that contribution is made. I would recommend that they "really quick adopt and terminate" the SEP so they could do the contribution, but one of the basic req's is no other qualified plan can exist (as now they have a 401k plan).

Anybody disagree with me? Any thoughts appreciated. By the way, you guys really are sicko's for choosing this profession.

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Assuming the SEP was properly adopted and not formally terminated, there is no reason why the employer could not make current contributions into it and the 401(k) profit sharing plan (assuming all eligible employees participate and IRAs are established). The SEP contributions reduces the otherwise allowable profit-sharing limit under Code Section 404; and Code Section 415 applies to both plans in the aggregate. If either plan is top-heavy, special rules may require that any employee eligible to participate in either plan receive a top-heavy minimum contribution.

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  • 4 weeks later...
Guest S FISCHER

Gary:

Is this also true of SIMPLE IRA's ? Can a sponsor who made a contribution to a simple plan in 2001 also make a P/S contribution for a new plan effective 2001?

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No. The other plan wd have to be effective after 2001; otherwise the SIMPLE IRA contributions will be turned into "wages" and "excess contributions" (assuming contributions are made to new plan) In the case of a SEP, the SEP and P/S plan share the same limit.

Generally, a SIMPLE must be the only plan of an employer. Exceptions would include a union plan for union employees that don't participant in the SIMPLE or a situation involving merger or acquisition when the entities (before such event) had another plan.

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Is this "the" Gary Lesser of the "IRA Answer Book"??

If so, I bow to your greatness. If not, you should have said you were him anyway.

Yes, and others; but no need to bow, I started the same way--by asking questions. Furthermore, most of what I know I've learned from others.

Also note that there are bio's of many of the folk that participate on B/L.

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Gary - can you clarify something for me? When you say that he can contribute to the SEP as well as the qualified plan, I'm assuming this is if he has a prototype SEP, and not the IRS model SEP? I've always understood that if you use the IRS model SEP, then you can't contribute to another plan. Thanks.

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  • 2 weeks later...
Guest lavander30

I have been racking my brain all day long trying to get my hands on the procedures for terminating an IRA-based Employer Sponsored Plan such as the SEP and SIMPLE - - I cannot find anything specific!

Gary mentioned that the answer to the original question depends on whether or not the plan was "formally terminated". Are you referring to Form 5310 being filed (which is optional)? And if so, and the 5310 is not filed (for a formal termination) does the employer simply "declare" the plan terminated and stop making contributions?

Thanks.

:confused:

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In general, contributions to a SEP are discretionary and need not be made from year to year. Thus, they are merely forgotten when adopting another plan. OTOH, if they are formally terminated by an amendment, the plans procedure for providing a notice of the amendment and a notice as to the effect of the amendment are required. In the later case, a new SEP plan (but not SEP-IRAs) would be required.

Although the effect of contributing a plan in addition to a SIMPLE invalidats the SIMPLE contributions for a year, I see no reason why a SIMPLE plan couldn't survive such an event (assuming all notices given timely) and unless formally terminated by amendment and presumably notice).

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  • 1 month later...

Gary,

Wrong forum here, but it is an IRA question and its in relation to your book, so I figured why not ask the master himself.

Re/ excess contributions to a traditional or Roth, I was reading your book about the 3 alternatives - 1) remove excess and earning b-4 due date of return, 2) remove excess after due date of return, pay excise tax, 3) just leave in, pay excess tax, count towards next years contribution.

My question really is this, let's say Feb 3, 2002 I put in $1,500 in an IRA for 2001. Then on Feb. 4, I say whoops I only have $1,000 of compensation in 2001. I call my custodian and say, I really meant to put $1,000 in my IRA for 2001, and $500 in for 2002. Do any of those 3 rules apply in this case? After all, I did have an excess contribution for 1 day...

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