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Help Gary! Excess SEP Contribution


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Guest Taxman

Scenario is as follows: For 2001 tax year, return has been extended to October 15. Taxpayer is self-employed, and went ahead and made his 2001 SEP contribution a few months ago, say in the amount of $7,000. Return is now finished, and due to earned income limitations the max deductible to his SEP is $5,000. What can be done with the extra $2,000, is it mandatory 10% excise tax?

What about a refund of the excess? I know this is allowable under Sec. 4972, which I believe applies here instead of 4973. Any help would be appreciated.

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It may be fortuitous that the excess amount is only $2,000. If he has not also made regular IRA contributions, it can be treated as a regular IRA contribution for 2002 (or 2001 depending upon when it was deposited). Whether it is deductible, partially deductible, or non-deductible would be determined under the normal rules.

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Assuming he will have sufficient income for 2002 to cover a $2,000 dollar contribution to his SEP, why can't he simply claim $5,000 as a 2001 deduction, and use the $2,000 "extra" as part of his 2002 contribution? As long as he actually deposited it in 2002, I don't see any problem with this, again assuming income sufficient to support it.

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Guest Taxman

The problem is it has been coded (according to the IRA custodian) as a 2001 contribution, just like all IRA contributions get coded. I already thought of trying to sneak by this way...

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You have only two options: 1. get the coding changed for

$2000 to 2002 by the custodian since the deduction will be taken for 2002.

2. ignore the coding and claim the $5000 deducton for 2001 and $2000 for 2002. Under IRC 404(h)(1)(B) SEP contributions are made for a taxable year if made on account of such taxable year and are made by the date for filing the return with extensions. This language is virtually identical to the language in IRC 404(a)(6) in which Rev. Rule 76-28 provides that the deduction is made on account such year by claiming it on the tax return. ONce the deduction is made it is irrevocable.

mjb

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According to my recollection, SEP contributions are NOT coded by year, they are suppose to be reported in the year received by the custodian, and it's up to the taxpayer to report it for the proper year. Any contribution made between 1/1 and 10/15/02 can be for either 2001 or 2002, and the taxpayer does not have a problem at all, unless the income for 2002 cannot support the contribution made.

Barry Picker, CPA/PFS, CFP

New York, NY

www.BPickerCPA.com

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If the amount is reported as income on the return (the correction, in the case of a self-employed) the 10 percent penalty can be avoided. [iRC 4972(©(3)]

If the trustee is informed of the excess and requests that the amount be treated as an IRA contribution for 2002, they are supposed to recode the amount as such. SEPs are not coded by year.

OTOH, Belgarath and Barry Picker have a good idea. Why not treat the excess as a 2002 SEP contribution.

Incidently, I'll be away next week and am depending on you all to keep this message center going. I'll also be leaving a very large and vicious dog, Gracie the Beast Slayer, behind to watch over my manuscripts (and six cats and a ferocious mole).

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Gary,

I'm confused.

If the SEP contribution was made in 2002, and SEP contributions are not coded by year, then for 2001 you deduct the maximum deductible, and the excess is automatically a 2002 contribution. There is no need to withdraw any excess, because there is NO excess (assuming that the 2002 maximum contribution is greater than the amount considered a 2002 contribution). Therefore, no 10% penalty, no 6% penalty, no problem at all.

Barry Picker, CPA/PFS, CFP

New York, NY

www.BPickerCPA.com

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Assuming the amount was contributed as a 2002 SEP contribution, you are absolutely correct. Arguably, however, the correct approach would be dictated by the written statement required to be provided to the employee indicating the amount of the employer's contribution for the year. The statement is required to be furnished within 30 days of the contribution or January 31 following the "calendar year for which the contribution is made." [Prop Treas Reg 1.408-9(B) (Note that at the time the proposed regulations were written, SEPs had to be maintained on a CY basis.)] So, we are back to the issue of whether the contribution was made for 2001 or 2002! Since the contribution was made several months ago (and the facts stated it was was a 2001 contribution), I naturally assumed it was made for 2001 and treated it as an excess. If so, it could be subject to penalties unless corrected.

Revenue Ruling 76-28 (modified slightly by Rev Rul 76-77) does not apply to SEPs (because IRC 404(a)(1)-(3) is not involved), notwithstanding that the language of Code Section 404(h) is similar to the "special rules for SEPs" under Coder Section 404(a)(6). Revenue Ruling 76-28 was written a few years before SEPs came into existance (i.e., in 1979). IMO, it would make more sense to go with the proposed SEP regulations in determining whether the contribution was, in fact, made for 2001 or 2002. If no notice was given within the 30 day period (and it might not have been), then arguably the entire $7,000 contribution is a 2002 contribution (all of it! :eek: ). If the notice was given (within 30 days), then some, but not all, of the amount contributed is an excess nondeductible contribution

In all likelyhood, the Service would use the proposed SEP regulations to determine which year an employer's SEP contribution was "made on account of." Otherwise, it would be difficult, if not impossible, to determine if and when an excess contribution was made (see, too, the IRC 402(h) exclusion rule).

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