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SEP - ineligible employer


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It does seem to be the season for the oddball situations to creep in.

Suppose you have an employer who sponsors a 401(k) plan. Doesn't do anything, doesn't contribute, but it is still a plan that is "maintained" by the employer.

Now the employer establishes a SEP, using the IRS 5305 model SEP document, and contributes to it for, say, 2014. It just comes to light now, when the CPA starts looking at all the employer's "stuff."

I read this as an employer eligibility failure. So it can be fixed under VCP, and it appears to me that the "fix" is to immediately cease contributions, while of course also making sure that all eligible employees received their contributions - if not, make appropriate corrective contributions with interest.

Anyone ever seen/done this? Am I missing anything? Seems like a very reasonable solution/correction, without too much "pain" involved for the employer (which is why I want to make sure I'm not missing something!)

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