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SEP contribution and 401k match


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New client discloses the following information during year end administration:

4 partners receive schedule c income and maintain their own individual SEP's. All 4 have contributed the max for the past several years. The SEP's are set up using the IRS model, not a prototype document. All compensation to the partners is paid via the plan sponsor of the 401k plan.

The company maintains a 401k plan with a discretionary match for 50 employees, all of whom are eligible. The partners do not participate in the 401k. The 401k has been in existence for several years. The partners have been maxing out in the SEP while providing employees with just a match dating back at least 5 years.

Question: How do they fix this? Do they go back and fund i.e. 25% contribution to all employees to the 401k or under the SEP? Are the SEP's disqualified?

Thank you

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I'm of little help in utter disasters such as this (my instinct is "run away") but it might be helpful, or at least interesting, to know how this money got into their Schedule Cs - I assume the partnership cut checks and issued 1099s instead of K-1s? Did they still get K-1s?

It implies that someone knew that they "could" set up individual SEPs if they had Sch C income and did it deliberately. Just sayin'...

Ed Snyder

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It implies that someone knew that they "could" set up individual SEPs if they had Sch C income and did it deliberately. Just sayin'...

Their accountant told them this plan design was perfectly fine. Not sure on the K-1's, but I will find out.

I appreciate the comments.

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