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SEP Plan is ineligible because company is part of a large controlled G


Guest Todd Lehmann

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Guest Todd Lehmann

My client has discovered that a member of its controlled group of companies has started and contributed to a SEP. When you look at the controlled group (which the broker did not) the group is ineligible to set up a SEP. An employer contribution has been deposited. How do you correct for an ineligible SEP? Is there any known guidance from the IRS on this?

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  • 3 weeks later...

If this is a new plan, the other entity can probably adopt it. Why do you say they don't qualify for a SEP, or, if under 25 employees a grandfathered SARSEP?

If coverage is not met, it is unlikely that this egregious error can be fixed under IRS CVR programs. The amounts contributed are W-2 wages and the contributions are excesses in the IRA (except to the extent they could make an annual $2,000 contribution).

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Guest Todd Lehmann

Gary, thanks for your response. My client is a large controlled group 1000 + employees. One of its business units started the SEP, that company has about 25 employees. My first understanding was that the large controlled group was not eligible to have a SEP. However, I researched SEP requirements a little more and it appears to me that you can set up a SEP no matter how big of a controlled group you have, however you cannot use Form 5305-SEP to set up the SEP. So, if the SEP can be set up, then everybody in the controlled group who has meet the eligibility requirements of the SEP needs to receive a contribution. This is a very large number and I know the client will not contribute to employees outside of the original company of 25 who received a contribution. If the client knew that all eligible employees of the controlled group had to receive a SEP contribution the plan would not have been set up. The client is going to terminate the SEP plan. What options does the client have?

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