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SEP IRA missed employee contribution correction


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Question on SEP IRA - Self employed individual has had a SEP for several years, no employees to begin with.  Eventually hires an employee but fails to make contributions for them for the first two years they were eligible - 2016 and 2017 but made contributions for himself at 20% of his net SE income.  So, we know that the employees contributions plus earnings need to be put into the plan ASAP.   They will be deposited by the end of the month.  My question is can the make up contributions be deducted on the 2019 or 2020 business returns?  If no other contributions are made for the 2019 return other than what is being contributed to fix the error can we apply an amount equal to 25% of the employees 2019 wage as a deductible 2019 contribution and apply the balance of the correction contribution as a deductible 2020 contribution when we file for 2020?  Does the entire deduction get lost?  Does it apply as a 2019 contribution and an excise tax place on the excess for 2019 for any amount over the 25% limit, or if not 2019 then the same situation for 2020 if the whole thing becomes a 2020 contribution?  Any guidance would be greatly appreciated!

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JTWeave, the controlling code section seems to be 404(h). Take a look at it. The answers to your questions are not readily apparent. If it were me, I would think about fixing with a VCP submission. I can't recall ever needing to include deductibility as an issue in VCP, but seems like this might be a case where you would want to try that. The years are outside the 2-year self-correction period for significant errors, so you really need to submit through VCP anyway to maintain the SEP's qualification.

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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