Transfer Sep to DB plan

[alanm]

Can a one participant, one employee sep plan terminate and the balance be transferred to a profit sharing plan adopted by that self employed individual? Also, can his regular IRA also be transferred into that profit sharing plan?

[mbozek]

SEPS are invested in IRAs. A participant can transfer all pre tax amounts from an IRA to a qualfied plan. After tax amts are not eligible for a rollover. However, some state laws may consider such a transfer to be a taxable event.

[Guest b2kates]

I may be wrong, I thought only funds in a conduit IRA may be transferred to a qualified plan.

[mbozek]

That was changed by EGTRRA sect 642(a) which amended IRC 408(d)(3)(A) effective 1/1/02. The funds could also be rolled over to a 403(B) annuity or a public employer 457 plan.

[Mike Preston]

I know this goes without saying, but what the heck. Make sure the DB plan's EGTRRA amendment includes the language that allows rollovers into plan from IRA's.

[Guest Chris Compton]

On that note... If a one life sole-proprietor has already contributed to a SEP in 2002, can he withdrawal his contributions from the SEP IRA and make a contribution to his new DB plan???

[Gary Lesser]

Yes and No. The amount can be withdrawn (but there is a special rule special rule for elective contributions). Nonetheless the amount will still be considered as contributed and eats up the DC limit under Code Section 415 (i.e., as a contribution to a profit sharing plan)- which isn't ordinarily an issue any more. For deduction purposes, the DB required contribution can be made, otherwise the deductible limit is 25% of compensation paid or accrued during the year (see IRC 404(a)(7)(A). There is a carryover-- or-->. For puposes of the 10% penalty on nondeductible contributions, the overage (if any) can be picked up as EI by the self-employed (corrected) and that amount then treated as an excess IRA and withdrawn by the individual by the due date of the individual's return (or that date as otherwise extended).

[mbozek]

Two Ideas here:

1. Can the 2002 contribution be considered made for the 2001 tax year. Remember sep contributions can be made up to the date for filing the 2001 tax return with extensions ( Oct 15).

2. Can the SEP contribution be rolled over to the DB plan and used to fund the DB benefit accrual and included as part of the the 25% of comp limit. Check with an actuary to see if it can be done.

[Gary Lesser]

1. Only if the contribution was "made on account" of such year. Having the trustee accept it as made for a prior year is usually sufficient. Generally, the contributon check is marker "SEP contribution {year}." But, the cover letter to the trustee and the trustee accepting (coding) it as a prior year contribution is also acceptable.

2. The SEP contribution (if rolled over) can never be used to fund employer-provided benefits in the DB. Before getting that extension, had anyone thought about making some of the DB contribution after the due date but before the time required under section 412 to satisfy the 25% (or min funding if higher) limit for at least 2002?

FWIW, I have heard of situations where the 10 percent penalty on nondeductible contributions is paid annually. In some cases, the large current deduction offsets the annual loss of the penalty payment.

Note: The fact that part of the contribution may not be deductible does make it an excess IRA contribuution. If deductible limit corrected to avoid 10% penalty, then an excess would appear to result in the IRA. Excesses in an IRA shd be corrected before any rollover is made to a separate account within the DB (if plan provides)(cd cost more to administer)(may offer greater creditor protection).

Note: the 25% limit only applies because there is a DC (SEP) and DB plan. A contribution of the minimum funding limit amount is deductible even if the 25% limit is lower. There is a carryforward [and penalty; the panalty disappears after it has been corrected] for unused deductions

[mbozek]

Gary: Many custodians do not mark or denote a contribution as designated for a plan year-- they merely report the amount of the contribution and the date made. The deduction is made for a tax year by claiming it on the tax return without any other designation. Rev. Rule 76-28. Employers like to preserve flexibility for allocating the contribution to a particular tax year by not designating the tax year on the check. But treating the contribution as being made for 2001 only works if the employer had previously filed an extension to submit the return by 0ct 15.

Since the contribution to a SEP is treated as a contribution to a separate PS plan (IRC 404(h)(3)) why not use the sep benefits be used a part of a floor offset plan?

[Gary Lesser]

You are correct in regard to SEPs.

The following rule from Pub 590 regarding traditional IRA annual contributions was contained in a proposed rule that was never finalized (except for the Pub).

Designating year for which contribution is made. If an amount is contributed to your traditional IRA between January 1 and April 15, you should tell the sponsor which year (the current year or the previous year) the contribution is for. If you do not tell the sponsor which year it is for, the sponsor can assume, and report to the IRS, that the contribution is for the current year (the year the sponsor received it).

Filing before a contribution is made. You can file your return claiming a traditional IRA contribution before the contribution is actually made. However, the contribution must be made by the due date of your return, not including extensions.