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2016 SEP for a Solo followed by a contribution in January is disqualified by adoption of a Cash Balance Plan in 2016


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A CPA called me and said Solo has adopted a SEP in Jan, 2016 and immediately funded it.

Now wants to do a CB Plan.

I called my brainy Tax lawyer and he immediately responded that the code says that the adoption of the CB plan will disqualify the SEP and the $53,000 will be disgorged by the IRA….No implications…he said that the adoption of the CB plan disqualifies the SEP not the other way around.

While I am thrilled by this, I am interested in hearing any comments….

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Did he give any citation for his reasoning?

My understanding is you typically have a deduction problem with the already made SEP contribution. That is you wind up having a partially non-deductible contribution to the SEP as the CB contribution is typically going to be well in excess of 25% of pay so to the extent that the SEP contribution is above 6% of pay it is non-deductible and subject to an excise tax.

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Was the January 2016 contribution a 2015 contribution? (You can set up a SEP after the close of the first year up through the due date of the tax return for that year.) If so, there can't be any issue here.

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