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Amend SEP to Allow 401K for 2017


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I am trying to figure out best way to fix this or at least minimize risk.

Company is S Corp with no employees (except owner and wife, both over 50). 5305-SEP was adopted at Fidelity in 2006 and max has been contributed every year.

Company erroneously made 2017 contributions to SEP and later set up solo 401K. Request was made to Fidelity to return those funds to company (ECPRS), Fidelity sent the check and will be sending 5498 and 1099-R (very small gain, $0 taxable, and code E for box 7).

After check was received, salary deferral was started and deposited in 401K. No deposits have been made for profit sharing yet, but plan was to contribute maximum.

I am concerned that the 401K could be disqualified because the 5498 will show a fairly large contribution was made to the SEP in 2017, even though it was later withdrawn.

Schwab offers a prototype SEP (Fidelity doesn't). If prototype SEP is set up to amend existing plan with effective date of 1/1/17, does this solve the problem?

Or just leave it alone and deposit all profit sharing to 401K?

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I guess the heart of the question is, assuming the "error" in making the SEP contribution was just that they had set up a 401(k) and wanted to contribute to that instead, but didn't, why was that an EPCRS issue and why was the return of funds appropriate? Seems like using the SEP for 2017 would be much safer.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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