Luke Bailey Posted December 10, 2019 Report Share Posted December 10, 2019 Sole proprietor adopts SEP, contributes in compliant manner for a few years. Has no employees. Later ceases to operate as a sole proprietor and becomes member of partnership and gets K-1. Keeps contributing to SEP as if K-1 were Schedule C income for several years. His only business income after joining the partnership is from the partnership, reported on the K-1 (i.e., individual does not have any non-partnership related Schedule C income after joins partnership). Assume partnership had no qualified plan and no non-5% owner employees. Partnership (i.e., other partners in their capacity as such) had no knowledge of SEP or that sole proprietor turned partner had continued to contribute to it. Assume also that SEP documents show individual's sole proprietorship as only adopting employer. A couple of other practitioners have looked at this and opined that the contributions based on the K-1 income are simply excess contributions to an IRA (i.e., they exceed the individual's contribution limit), IRC sec. 4973 6% excise tax is owed, contributions must be withdrawn to stop further excise tax, individual will owe ordinary income tax on distributions reportable on 1099-R, and will be subject to 10% premature distributions tax under IRC sec. 72(t) because under 59-1/2, and IRC sec. 4972 tax on nondeductible contributions also applies. However, EPCRS seems generally to treat SEPs analogously to qualified plans, and it seems that there has been a violation of 415(c) and we have excess amounts that under EPCRS need to be distributed to employer (which, admittedly, is the same individual) as a return of an excess amount, and that the returns for prior years should be amended to reflect nondeductibility, and the 1099-R will show "$0" as the distribution amount to individual. The IRC sec. 4972 tax would still need to be paid. See Section 6.11(5) of Rev. Proc. 2019-19. I don't see why the rule would apply differently just because a single participant sole proprietor SEP is involved. VCP would be required, since SEPs qualify for SCP only for insignificant failures, and anyway this is more than two full plan years old. Anyone ever dealt with IRS on this or a very similar issue? Any other thoughts? Luke Bailey Senior Counsel Clark Hill PLC 214-651-4572 (O) | LBailey@clarkhill.com 2600 Dallas Parkway Suite 600 Frisco, TX 75034 Link to comment Share on other sites More sharing options...
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