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Reverse ER SEP contribution?


Guest Carolyn Barnard
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Guest Carolyn Barnard

My client initially only had a SEP Plan for 2007. His business is fairly new and he was going to have to make his first contribution for 2007 for an eligible employee who had worked 3 of the last 5 years. His CPA advised him to set up a profit sharing plan, which he did, but he had already contributed $2,500 to his SEP prior to establishing the PS Plan. He would prefer that all contributions be made through the PS Plan for 2007. Is it possible to withdraw that $2,500 contribution, subject to applicable taxes and penalties, giving the appearance that there will be no funding for the SEP in 2007 for himself or the eligible employee? Or is he required to make the contribution for the employee for 2007? If so, and if he decides to terminate the SEP now, is he required to make a contribution for himself and any other eligible employees for 2008 since the plan was in existence for a portion of 2008?

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  • 1 month later...

It depends. In general, PS contributions are reduced by allowable deductionsd to the SEP.

Since employer SEP contributions were made, but not allocated to all eligible employees, the SEP has already violated the uniform allocation formula and is discriminatory. If fixed under the Code, the amount should be reported as wages, not deducted, and corrected (remove excess contribution, adjusted for gain/loss) by the due date of the return (to avoid 6% penalties). The gain is taxable and may be subject to a 10 percent penalty. Alternatively, the employer can fix the SEP problems under the EPCRS by making restoritive contributions (with interest) to employees. Perhaps a SEP (integrated), would have been far less costly to administer than a comparable ordinary profit-sharing plan. Why did the CPA think the profit-sharing plan was better (for this client)? Higher contributions? Ability to include more people?

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