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Reporting SEP contributions to IRS


Guest nirvana
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Guest nirvana

Hi, we have C corp with Sep to Aug financial year. The corp can contribute to our calenday year 2003 SEP IRA till Nov 15th (or extension) but my W2 shows NO Retirement plan. Also, I put in $3000 into my 2003 regular IRA account which I can take deduction on since the company has not yet contributed to SEP.

What is the correction process if the corp contributes to SEP IRA:

1) Before I file my taxes on April 15th

2) After I file my taxes

Thanks. I have been looking for more info in SEP IRA and all I could find so far was information on setting up the SEP. This is a wonderful site with its interactive forum.

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Nirvana,

I am not sure why you think a correction would be required.

The employer SEP contribution does not affect the amount you contribute to your IRA. The amount your employer contributes can be 100% of your compensation up to $40,000 for 2003. In addition to your SEP contribution, you may deposit/contribute your $3,000 to your IRA.

Please post any follow-up questions

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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Guest nirvana

Thanks for the reply. One of my concerns was the deductability (not deposit) of the IRA contribution.

When the W2 was issued the company had not yet setup an SEP plan. So the W2 was correct at that time. Since then a decision has been made to contribute to SEP IRA.

Because the 'Retirement plan' box is not checked on my W2, I can take deduction on the $3000 contribution to regular IRA. But if I read the regulations correctly, when the company contributes to SEP (about $25000) that $3000 would not be deductible.

There are two issues - the company's obligatiion to report SEP IRA on W2 and my decision on whether to take the IRA deduction.

a) Does the company have to correct the W2 for 2003?

b) Would it be best for me to file my taxes for 2003 without taking the IRA deduction knowing that SEP amount will be contributed sometime before Nov 2004.

Thank in advance.

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For SEP IRAs, you are considered an active participant for the (your) taxable year that the contribution is deposited to your SEP IRA. Therefore, if the employer deposits your SEP contribution for 2003 during 2004, you are not considered active for 2003. Consequently, the contribution would affect your ability to deduct your 2004 IRA contribution…and the company would not be required to issue a corrected W-2. This rule applies to plans for which contributions are discretionary

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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Guest nirvana

This is great news - I assumed that the contribution year is what matters. :D

Does the amount of contribution need to be reported on W2 or is it just the 'Retirement plan' check box that needs to be ticked for 2004?

Also, would there be issues with IRS if the corp conributes a large amount to SEP and shows a net loss?

Thanks again for your help.

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:blink: I'm not entirely sure I agree with the above result (if the plan is top-heavy for the 2003 PY), or generally with the "rule" of law, as stated. Here's my take--

If, with respect to a particular plan year, no employer or employee elective contributions have been allocated to the SEP IRA by the last day of the plan year, and contributions are purely discretionary for the plan year, an employee is not treated as an active participant for the taxable year in which the plan year ends. It must be noted, however, that when discretionary contributions to a SEP for two plan years are made in one calendar year, the contribution for the later plan year is deemed to be made in the next taxable year solely for the purpose of determining active participant status.

If an allocation must be made to the SEP IRA of an employee with respect to a particular plan year, the employee will be an active participant in the taxable year in which the plan year ends. For example, top-heavy minimum contributions are not discretionary—and thus an allocation must be made. On the other hand, elective contributions cause active participation for the plan year as of which the deferral contribution is allocated.

Example. In 2004, but before the due date of its 2003 federal tax return, Acme Corporation establishes a SEP for 2003. Discretionary contributions are made to the SEP in January 2004 for the 2003 taxable year. Participating employees will be treated as active participants for their 2004 taxable year. If Acme also makes a 2004 SEP contribution in 2004, participating employees will be treated as active participants for the 2004 taxable year. [Notice 87-16, § I(A), Qs A-21-A-26, 1987-1 CB 446; Ltr Rul 9008056]

© Source: SS&S Answer Book, Q 5:33 (9th Edition)]

Thus, it is possible that required contributions could cause active participation for 2003, even though the contribution was made after the end of the plan year. If so, employer should issue amended W-2 Forms.

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Guest nirvana

Gary, from your post I infer that the difference between the two cases is whether the contribution is discretionary or not.

Would this be another way of putting it:

"If contributions are made for atleast one employee within the plan year, then all employees are considered to be active during the plan year even if the rest have contributions made after the plan year."

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Correct. But if the plan is top-heavy, the contribution is not discretionary.

Only contributions to that emplopyee's account are considered. But, contributions have to be allocated to all employees-so that's not possible. If that is done, the plan may not pass muster and there is no answer to your question that I know of.

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