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sep treated as a sarsep


Guest JBarid
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Guest JBarid

Hello All,

I have a new client who has been treating his SEP as a SARSEP. Can he go through the self correction program to fix this?

Thanks!

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SCP, maybe (see below). See Section 6.10(5) of the EPCRS (Rev Proc 2006-27) for overcontributions. Correction under this section generally requires the participant's consent (for trustee or custodia) to have funds disgorged (adj. for earning) from IRA. It might also be possible to leave the funds in the IRAs and pay a fee (10%) under section 6.10(6) and loose the deduction as well for the excess elective contributions.

The employer will have to determine which of the two possible EPCRS approaches is better and whether the fix would be any better if Code provisions alone (a third approach) were used to correct the failure. Legal fees aside, the third approach would probably be more costly, especially if several years are involved.

As one practitioner put it, conflicting and interrelated correction methods have to be resolved to find the fix that best serves the needs of the employer.

The facts presented do not seem to indicate that the failure was egregious (see Section 4.11), however, SCP is only available for a SEP if the failure was insignificant (see Sections 4.01, 8.01). See Section 8 "factors" to determine whether the failure was insignificant.

See EPCRS: EPCRS - Rev. Proc. 2006-27

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Guest JBarid

I will read those sections. I don't think he even knew enough to take a tax deduction for his business! The participants will be suprised when they find out that their deferrals wre not supposed to be in the plan and now that money is taxable! But I will try to find the best way to fix this without putting too much on the participants.

We are going to terminate this SEP and he will be opening a 401(k) with my company so administration will be done correctly.

Thank you for your help!

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