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Withdraw a SEP contribution


Earl
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Employer makes a 20% contribution to himself in Jan 2011 for 2010. Then discovers the EE contribution is more than he can afford.

Can he withdraw part of the contribution from the SEP (note it is not an excess contribution) to a level he can afford for the employees?

He does not want to apply some to 2011 as he is adopting a PS/401k Plan.

(I guess he could lie to the IRA company and tell them it is an excess contribution and get it back, not sure even about that. Trying to be honest as a first option.)

Thanks for any ideas or information.

CBW

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Technically, a SEP is a traditional IRA. Unlike a SIMPLE IRA (whose account is funded exclusively with SIMPLE IRA funds) and SEP contribution "MAY" be funded to a traditional IRA. The Form 5498 is the major tracking to differentiate the SEP contribution from the traditional IRA portion. What I would recommend is trying to classify $5,000 of it as a traditional IRA contribution (even if non-deductible). You can also classify another $5,000 as traditional IRA for 2011. While the account doesn't change, the 5498 reporting can work wonders; and it is consistent.

The key is whether the custodian will reclassify them appropriately.

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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Thank you -

Am I correct that this would require changing the contribution, $49,000, from a company contribution to W-2 pay since IRAs are personal contributions?

So I could convert it to W-2, tell the custodian it is $5k for 2010 and $5k for 2011 and then telling the custodian to refund the rest as an excess contribution. If done by filing of 2011 personal return there would be no penalties. Sound right?

Any opinion on ability of company or individual to just tell the IRA to refund the (now) unintended amount? If it were a Qualifed Plan I think the answer would be "can't return the money" as it would not have been "a mistake of fact" or any other legal reason I can think of.

But an IRA? I am going to call the IRA company when they open Monday to get their "party line response".

Thanks again.

CBW

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My experience with IRA providers is they will NOT return money without reporting it as a distribution in some way shape or form. You are not allowed to make mistakes with IRAs and just ask for money back. (I can't say I have a lot of sympathy anyway for that reasoning in this instance.)

Ed Snyder

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Keep in mind that W-2 and SEP contributions are not 'commingled' in a sense that changing a SEP contribution would necessitate a change in W-2. What you are effectively doing flowcharting how all employer and account records has the individual funded the IRA and the SEP for the desired amounts. This shouldn't impact W-2 as the resulting SEP contribution would merely be a lower percentage of W-2. It would impact the 5498 as their would be a separate form issue for the SEP contribution and the IRA contribution.

The ultimate key is consistent of all records. Typically, the IRS's preferred method of correction is to make additional contributions. I am thinking that if desposits were made, but allocated in a different (and legal) manner, then the entire case would become a non-issue. When we get into removing contributions (which isn't entirely inconceivable), then you may deal with a different animal. There is always an option for the $250 VCP filing for SEPs to get the IRS to approve exactly what you want to do (removing the excess because of the confusion); but any other alternative should preserve a consistent audit trail.

I know it sounds as if I am speaking in circles, but I am not sure removing the funds will be the best approach. It may be (since these are IRA accounts and the extended tax-filing deadline isn't here yet), but I would really research all implications on that approach before proceeding. Without actually doing detail research, I cannot provide a more definitive answer (but only thoughts and possible approaches), and I appologize for that.

The IRS party line is a good approach!

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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Thanks for your thoughts. Very helpful and appreciated.

Although I am still not clear on how an employer can make a Traditional IRA contribution to an employee's Traditional IRA without reporting that payment as W-2 wages to the employee. Otherwise the employee would take a deduction for income never received. And how would the employer deduct it?

But that is not really the issue here and maybe you are not referencing changing part of the SEP contribution to a TIRA contribution.

CBW

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Earl, I see your question. My contention was to make it as if it were not the 'employer' making the contribution, but the employee. Hence, the employee would be responsible for reporting it as an IRA contribution and completing the Form 8606 (for nondeductible amounts) to the extent necessary. The employer will not take a deduction for that portion. There may be some asset tracking issues to resolve on the employer's books.

Bird, I agree 1000%. This is why any approach would have to account for the entire flow (including the way things operate and and way they are reported) to ensure any action doesn't make a bad situation worse.

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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What I would recommend is trying to classify $5,000 of it as a traditional IRA contribution (even if non-deductible). You can also classify another $5,000 as traditional IRA for 2011.

CAUTION: This hanky-panky strategy may subject the payrol deduction IRA plan to ERISA (and full DOL reporting, including a SPD). DOL regulations provide a safe harbor under which payrol-deduction IRAs will not be considered to be pension plans when the conditions of the regulation are satisfied. Sounds like a conspiracy to avoid reality.

The safe-harbor rules require that:

1. No contributions are made by the employer or employee association;

2. Participation must be completely voluntary for employees or members;

3. The sole involvement of the employer or employee organization is without endorsement to permit the sponsor to publicize the program to employees or members, to collect contributions through payroll deductions or dues checkoffs and to remit them to the sponsor; and

4. The employer or employee organization receives no consideration in the form of cash or otherwise, other than reasonable compensation for services actually rendered in connection with payroll deductions or dues checkoffs.

[Emphasis added. ] [DOL Reg. § 2510.3-2(d)] The amounts are treated as "wages" on Form W-2 for all purposes.

Unless the SEP plan were invalidated (e.g., adoption of a Simple IRA Plan), there is nothing that can be done. :shades:

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That was the entire point. These aren't payroll amounts that were contributed to the SEP. They were amounts directly from the owner's bank account that were misclassified as SEP contributions; at least that's what the audit trail and reporting is made to state. Otherwise you have a non-uniform formula made to the SEP where the preferred method is additional allocations to the NHCEs.

The question presented was whether the excess could be classified as an excess IRA contribution and be removed from the account? I would welcome your thoughts on that.

I do agree with the points you've made :)

CPC, QPA, QKA, TGPC, ERPA

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Actually, the question is can he withdraw a contribution to a SEP that is not (technically) an excess contribution.

The contribution is within the deductible range but he now does not want to contribute the amount that he deposited (in Jan 2011 for 2010).

And he does not want to carry it forward for the current year because he wants to set up a Profit Sharing Plan.

Reading pubs 560, 590 & IRS website it seems to me that he can.

Most telling items I found were

1) 590, page 32: If you made IRA contributions in 2010, you can withdraw them tax free by the due date of your return.....

2) IRS website: Employers contribute under a SEP plan to each participant’s SEP-IRA, and a SEP-IRA is generally no different from any traditional IRA. (this is the issue you pointed me toward - so thanks for that)

So I am comfortable with the idea that it is subject to IRA distribution rules rather than qualified plan distribution rules (which would not allow it since this is not a mistake of fact, just a bonehead play.)

CBW

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If the contributions are not made for employees, then the plan needs fixing. The contribuition when made should have been allocated to all eligible employees--it wasn't--an operational defect. That being said, would the IRS allow you to reallocate the existing contribution among IRAs (I DOUBT IT with these facts) or require that you add more money??

If no contributions are made for rank and file employees then, the owner' entire contribution is a nondeductible excess (under the Code). However, the employees may have rights under state law because plan provisions (regarding allocations) were not followed.

Best scenario--condider asking trustee to reallocate the funds as they should have been allocated to begin with.

Figuring out the allocation compensation for the (entire) year may be difficult and create additional problems if the amounts are not correct.

Hope this helps.

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  • david rigby changed the title to Withdraw a SEP contribution

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