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How to correct overfunding of SEP-IRA by company for 1998


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Posted for Jan Hufnell:

"As an owner of a small corporation, I have a SEP-IRA plan for retirement. As of May 31, the end of my corporate year (FY'98-99), I have overfunded the plan by about $900.

"My questions:

"(1) Do I have to move these funds out now - that is before May 31 - so I don't receive a penalty, or can I wait until I file my fy yr end tax return to 'clean up' the excess - by August 15? Last year I underfunded and had until Aug 15 to put funds in to match 15% of my salary.

"(2) When I do move them out, where can I put them? Can I add this to next year's SEP fund and just 'paper move' the funds to next year like I do whenI add money for underfunding after the end of the fiscal yr but before tax deadline of Aug 15?

"(3) My statements from the SEP plan are issued and reported annually; I am working on a corporate year to calculate what I owe. I use my salary taken from June 1, 1998 to May 31, 1999. My accountant and investment mgr both keep records of movement of monies and adding when underfunded, but nothing official is done otherwise. Is thisthe correct way to calculate the SEP?

"Thank you.

"Reminder: this is not a "simple" plan; it is a standard Sep-IRA for one

employee. Is this the best plan?"

-- Jan Hufnell

Hufnell, Inc.

P.O. Box 9058

Wilmington, DE 19809-0058

(302)764-5084

fax: (302)764-3289

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Guest ezollars

I'll address some of the concerns here. The one quirk I see here is that we have a fiscal year SEP--and I'll admit right off that I don't normally see those (so tread carefully with what is said from here on ).

That said, I think that IRC Section 408(d)(4)'s rule for the distributions of excess IRA contributions is going to control in this case. That would require the funds (and related earnings) to come out by the due date for filing your personal return for the year of the contribution. It's not clear to me that you can "shortcut" the process (simply say it's the next year's contribution), since the earnings would appear to be required to come out and be subject to tax.

A more interesting question is how you "overfunded" the plan. I assume you ended up making contributions during the year that, at some point, exceeded 15% of your compensation for the year and did not end up taking out additional salary to establish earnings to allow the contribution to be made. My immediate suggestion is that, in the future, you might consider making sure you don't exceed the 15% on a current basis.

Of real concern is the potential issue that you now see yourself as overcontributed because you are counting the reported earnings of an S corporation in computing what can be contributed to the SEP. Only salary paid (not pass through earnings) of an S corporation can be the basis for a SEP contribution. I ask this because while it may be possible to "overfund" a self-employed person's SEP by accident (have a loss in the last month of the year), it seems more difficult to accidentally overfund in the corporate setting. Salary, unless self-employed earnings, doesn't change later, even if the corporation ends up losing money.

As to which plan is best for you--that's a matter of professional judgement, exercised after considering all of the facts related to your situation. In essence, there's no simple answer to that question and anyone who is going to provide an answer you could rely upon likely is going to want to be paid.

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