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Cancel a SEP


Fisher
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I have a client who opened a SEP account in May of this year. There have been 4 contributions made of $1,000 each. He has been informed by his CPA that he should have a 401k instead. I am trying to find out if we can set up a 401k, then have the 4 contributions moved to the 401k and reclassified as 401k contributions instead of SEP contributions. He did use the IRS model 5305-SEP to set it up.

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Probably should have started a SIMPLE IRA, but too late. He can still initiate a 401(k) for the current year as the SEP (nor 401(k)) has any exclusive plan requirements. You should ensure the SEP is written to a prototype SEP (not the IRS Form). From there, just continue to fund the SEP or (leave the $4,000 there) and begin funding the 401(k) and profit sharing. The SEP contribution is treated as if it were a profit sharing contribution for deduction purposes.

No big deal, just pattern you moves not to run afoul of any rules. You'll be fine.

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Well, SEP contributions are likely allocated pro-rata so it's highly unlikely they were allocated correctly. So you might have to tweak them after the end of the year (to bring everyone else up to the highest percentage received by any participant). You definitely can't move the money to a 401(k) but you can just make sure the contributions were allocated properly and also start a 401(k) for this year.

Ed Snyder

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