spiritrider

First, you have until the businesses tax filing deadline including extensions to remove excess SEP IRA contributions. Second, you may not have to remove the excess contributions. Call Schwab and explain the problem. Their SEP IRA is a prototype SEP IRA which can be maintained with a 401k for the same tax year. I believe (with verification from Schwab), you can adopt a prototype SEP IRA, rollover the 5305-SEP IRA balance to the Schwab prototype SEP IRA, adopt a one-participant 401k and make the employee deferrals. Then you can decide if you want to rollover the SEP IRA to the one-participant 401k and even whether to make future employer contributions to the SEP IRA or 401k (subject to the annual addition limit either way). Note: The sooner your one-participant 401k year-end balance reaches $250K, the sooner you will have to file Form 5500-EZ. However, there maybe other valid reasons to rollover the SEP IRA balance and make future employer contributions to the one-participant 401k.

Oops, I was the one making the mistake. I was not aware that excess annual additions could be reallocated as catch-up contributions. I was under the mistaken impression that only employee deferrals and catch-up contributions could be reallocated between each other.

No, this is a common mistake. They can only receive a $26,687.27 profit sharing contribution. There is no $63,500 combined limit. There is a $57,000 annual addition limit. The catch-up contribution is not included in the annual addition limit and the catch-up contribution limit only applies to those contributions. The employee deferral is capped at $19,500 and the catch-up contribution = $22,000 - $19,500 = $2,500. The remaining $6,500 - $2,500 = $4,000 is unavailable. The maximum profit sharing contribution = $57,000 - $19,500 - $10,812.73 = $26,687.27.

That which is not specifically prohibited is generally allowed. That is why it may be difficult to find explicit guidance. This is entirely subject to the plan document and plan rules. Even some plans that do not allow employee after-tax contributions will accept and separately account for rollovers of employee after-tax contributions and associated pretax earnings. A bigger question is why would the participant wish to take such an unwise action. The earnings on employee after-tax contributions and current pre-tax earnings would continue to be pre-tax. It would make far more sense to do a direct split rollover of the employee-after-tax contributions to a Roth IRA (stopping any further pre-tax earnings) and the pre-tax earnings to a traditional (pre-tax) 401k account or traditional IRA (may not be advisable). If the pre-tax earnings on the employee after-tax contributions are minimal, alternatively the participant could do a single direct rollover to a Roth IRA with the earnings taxable. The IRS did provide direct guidance on the above in IRS Notice 2014-54. Clearly it is permissible.

An MP plan is not any different that any other employer plan in that it still requires compensation from the sponsoring employer. Solely passive real estate income is not compensation. The taxpayer must be actively engaged in the business of real estate and not just receiving passive rental income. In order to it be considered self-employed earned income you must be engaged in a trade or business. The IRS reiterated in the Final Section 199A QBI regulations that under Higgins v. Commissioner. In order to be considered engaged in a trade or business. The taxpayer is required to: Enter into and carry on the activity with a good faith intention to make a profit or with the belief that a profit can be made from the activity. To have considerable, regular, and continuous activity. For example, under 401c, in order to be considered a self-employed individual eligible to adopt, maintain and contribute to a 401k. They must have self-employed earned income from a trade or business in the current or any prior year. FYI, a rollover is a rollover contribution. If you are not eligible to adopt the 401k in the first place to for employee and/or employer contributions. You have no 401k plan to accept a rollover contributions. Even though it is a moot point, I fail to see how the "substantial and recurring contributions" requirement is practically applicable to a one-participant 401k plan. It is intended to prevent discrimination and harm to participants. The correction is a partial termination requiring immediate vestment. One-participant 401k plan contributions are always 100% vested.

Bill Presson is correct. From the content of your first three questions, it indicates you need a tax professional to correct these to the extent possible. For the last question, Excess SEP IRA contributions not returned by your tax filing date including extensions are a plan error. This is most definitely not an inexperienced DIY correction process. You need to engage an experienced professional retirement plan specialist. Tax professionals seldom have the knowledge or experience necessary.

We need more information. Does either business have non-spouse employees. A SIMPLE IRA is generally not the best solution for a small business with no non-spouse eligible employees. A one-participant 401k or SEP IRA depending on compensation would allow for far greater contributions. A SIMPLE IRA may be the right solution for a small business with a limited number of non-spouse eligible employees. If the husband has no non-spouse eligible employees and the wife does, it is probably better that they have separate businesses and employer retirement plans (assuming No CG/ASF, E.g. no minor children). If they both have non-spouse eligible employees, it might be better if they use a single business entity (S-Corp, Partnership and if eligible QJV) and a single Safe Harbor 401k. It would be a single business/plan with a single base administrative fee and maybe only a small incremental fee per employee. Although, many TPA business models have a base fee that includes up to a certain number of participants and cost no more. Of course, there may be tax reasons to have one S-Corp and one sole proprietorship or it might be a good idea to maintain separate businesses for marital harmony.

I was not referring to your post, but that of the OP. Which is a different fact pattern. A business owner that has suffered adverse financial consequences (closing or reducing hours of a business owned or operated by the individual due to such virus or disease) can take a CVD. However, rental income rarely qualifies as being engaged in a trade or business. So depending on those fact and circumstances this may not qualify for a CVD either. P.S. As Larry has pointed out. Whether a participant is qualified or not. If they certify they are, the plan has no reason not to make the distribution.

Plan Language

I don't disagree with what you are saying here. Any potential consequence of a self-certification of even blatantly non-qualified facts and circumstance are on the participant and not the plan. It is not the plan's responsibility to verify anything. However, I do disagree with the first sentence of your post I replied to, because the OP asked if the participant would qualify. Currently, with those facts and circumstances they do not. Now I will admit, even if congress or IRS guidance does not expand adverse financial consequences to those of the entire family. The IRS is unlikely to take any corrective action with such a fact pattern. Still the participant does not qualify and that was the question.

I am going to have to 100% disagree. As written, the legislative text clear states, that only adverse financial consequences as a result of direct effects borne by the the plan's participant qualify. A spouse's adverse financial consequences do NOT qualify. Only for that spouse's retirement accounts. Maybe, guidance or additional legislation will clarify this, but as it stands, that is a firm NO to the circumstances described.

How would this be mechanized. Wouldn't the distribution be required to be reported on Form 8915 and the taxation proportionally applied over three years and reported on Form 1040 Line 4d. Wouldn't whatever year(s) the Roth Conversion(s) were done have to be reported on Form 8606 and also reported in Form 1040 Line 4d. How would this be reconciled.

You realize you are resurrecting a > two year old zombie thread. For the Roth 401k contribution and Roth IRA contribution, see IRS publication 590-A, What Is Compensation?, page 6: Self-employment income. If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of: The deduction for contributions made on your behalf to retirement plans, and The deduction allowed for the deductible part of your self-employment taxes. A Roth 401k contribution is not a deductible contribution and therefore does not reduce compensation. For W-2 employees, Roth 401k contributions do not reduce W-2 Box 1 wages (compensation). For the SEHI deduction the Roth 401k contribution, see Form 1040, Self-Employed Health Insurance Deduction Worksheet—Schedule 1, Line 16, page 86, Line 2. Enter your net profit* and any other earned income** from the business under which the insurance plan is established, minus any deductions on Schedule 1, lines 14 (1/2 SE tax) and 15 (401k deduction). (labels mine) The SEHI deduction does not reduce compensation available for IRA contributions and the Roth 401k contribution does not reduce self-employed earned income available for the SEHI deduction, because it is not a deductible contribution. P.S. There is an error in my previous post from two years ago. The employee deferral + catch-up contribution can not exceed net self-employment earnings. So item 2. can be only $587 and if so, item 3 will be $0.

However, only the pre-tax assets can be rolled over from a traditional IRA to a qualified plan pre-tax account. The prohibition against the rollover of non-deductible basis is intended to preserve the integrity of the qualified plan pre-tax account. I'm not sure what point you are trying to make.

Short answer, I agree with Larry. The delay until 7/15 is actually a postponment of the tax filing deadline it is not an extension. 7/15 is the new due date. An extension if elected by 7/15 is until 10/15. Sometimes semantics matter. While in press releases and other communications the IRS and just about everyone else has incorrectly used the term "extended". In the actual guidance, the IRS has explicitly used the term "postponed". Why the semantics matters, is that this has all been done under the IRS' statutory authority of Section 7508A Authority To Postpone Certain Deadlines By Reason Of Presidentially Declared Disaster... When the IRS "postpones" a deadline under this section, it applies to all other code sections referring to the appropriate deadline. Also, I agree with Larry's other point if an extension had been filed. "but there are some people who say that once you file your return by your regular due date, any extension received is null and void." Those people are quite simply incorrect. Contribution deadlines are specifically only referenced to the tax filing due date and for employer plans optionally the extended tax filing date. Just like you have until the tax filing due date to make IRA contributions regardless of when you file. You have until the tax filing due date including extensions to make employer plan contributions regardless of when you file. Of course, you have to either presumptively taken the deduction or file an amended return.

On the Topic of Roth conversions, I just have more questions than answers. I defer to much more knowledgeable people; Mike Preston, Larry Starr, etc... for a concrete answer. At first glance, it would not appear that taxable rollovers to a Roth IRA or Roth conversions are intended for CRDs in the CARES Act. The purpose of allowing the distributions and 3-year rollover is to provide immediate money to people with a significant need. Not an excuse to do Roth conversions, especially not deferring the taxes over three years. Not to mention, how would it be mechanized. Would you be able to claim "nondeductible" basis on the taxes already paid over three years on Form 8606s and Form 1040 lines 4a/4b to report the Roth conversion??? Would you report a direct rollover from a pre-tax qualified account to a Roth IRA on Form 1040 lines 4c/4d??? With 4a/4c original distribution amount and 4b/4d taxable earnings??? Personally, there are way too many unknowns. I wouldn't even begin to think about such an action, unless/until there is explicit IRS guidance that this is OK. To paraphrase from the CARES Act. The adverse tax consequences could be very severe.

Just because Section 2202(a)(3)(A) of the CARES Act doesn't explicitly call out any section 408A sub sections does not mean Roth IRAs are not eligible. In many cases in the IRC, sections are incorporated by reference. In this case by 408A(a) and 408(d)(3)(B) Section 408A(a) General rule Except as provided in this section, a Roth IRA shall be treated for purposes of this title in the same manner as an individual retirement plan. Section 408A(e) Qualified rollover contribution For purposes of this section— In general The term “qualified rollover contribution” means a rollover contribution— (A) to a Roth IRA from another such account (B) from an eligible retirement plan, but only if— (i) in the case of an individual retirement plan, such rollover contribution meets the requirements of section 408(d)(3) (ii) N/A to a Roth IRA to Roth IRA rollover. For purposes of section 408(d)(3)(B), there shall be disregarded any qualified rollover contribution from an individual retirement plan (other than a Roth IRA) to a Roth IRA.

As alluded to by Larry, this is likely a misunderstanding and/or miscommunication by/between the advisor and you. As he also pointed out this is likely a distinction without a difference. Important considerations: While some might think it is semantics, there is no monolithic $62K limit for 2019. There is a a $19K employee deferral limit, a $56K annual addition limit and a $6K catch-up contribution limit if and only if the applicable employee deferral limit is reached. Employer contributions are limited to 25% of the plan's compensation, but is calculated as 20% of a self-employed individual's net earnings from self-employment (business profit - 1/2 SE tax). The annual addition limit does not apply to any catch-up contributions Therefore, only ($56K - $19K = $37K) / 20% = $185K in net earnings from self-employment is required to make the maximum employee deferral, maximum employer contribution and maximum catch-up contribution for a total of $62K in total contributions. This is why Larry said that it might not matter. Of course providing the correct contributions are made. Notwithstanding the above, since the client is >= age 50. They could make greater retirement plan contributions in the future with a paired 401k/defined benefit plan. They would need to have reasonably stable net earnings from self-employment for a minimum of five years. So maybe this isn't the year to start thinking about doing it. However, it might be an option for the future.

You might want to tone down your rhetoric. This is a professional forum by professionals primarily for professionals. They are gracious enough to occasionally try and help the members of the public deal with issues. You are new member who has registered and only posted in this one thread. Usually when someone visits someone else's house they conduct themselves with manners and respect. Maybe the employer is at fault, but it has been like pulling teeth to get straight answers. Yet you have failed to demonstrate that you understand just how much responsibility you and your wife share in for this disaster. It is mind boggling how your wife can not know for five years that her deferrals have no been deducted from her paycheck. It is mind boggling that you can not know what your joint investment portfolios are doing over five years. You never checked to see that contributions were deposited and what the earnings were over time. Your conduct in this thread is not likely to inspire professionals to take time out of their busy days to receive abuse in return for their attempts to help.

An employer always has until their tax filing deadline including extensions to make employer contributions. If your client is a taxpayer normally with a 4/15 tax filing deadline, the tax filing deadline has been postponed until 7/15 and they would have until 7/15 to make employer contributions. Also, as always they can delay that contribution until 10/15 by filing for an extension. If the client is not a taxpayer normally with a 4/15 tax filing deadline, the tax filing deadline has not been postponed. However, as always they can delay that contribution for up to six (6) months after their tax filing deadline by filing for an extension. For the OP, I am not aware of any CARES Act provision that would allow the suspension of SIMPLE IRA employer contributions.

To amplify @Belgarath Homeland Security has issued guidance not mandates on "essential bussinesses". I quote: "This list is advisory in nature. It is not, nor should it be considered, a federal directive or standard. Additionally, this advisory list is not intended to be the exclusive list of critical infrastructure sectors, workers, and functions that should continue during the COVID-19 response across all jurisdictions. Individual jurisdictions should add or subtract essential workforce categories based on their own requirements and discretion."

True, but if he can max out the employer contribution. His Roth MAGI is too high for direct Roth contributions. The SEP IRA contributions would interfere with Backdoor Roths. Although, I suppose if his employer allows IRA rollover contributions. He could make the SEP IRA contributions, roll them over to his 401k and still do Backdoor Roths.

A 457 plan is not a qualified plan. 457 employee deferrals are not included in the 402g employee deferral limit. Total 457 (employee + employer) contributions are limited to the same amount as the employee deferral limit and are not included in the 415c annual addition limit. Also, 401a mandatory contributions are not considered employee deferrals and are not included in the 402g employee deferral limit.

Sometimes my brain works in mysterious ways. I was answering a SIMPLE IRA question shortly before reading the OP and somehow managed to ignore everything of direct relevance including the damn thread title. I'm the one who should be crying tears of humiliation.

Don't ask me why the congressional drafters decided they had to do things differently for a SIMPLE IRA than for SEP IRA and 401k employer contributions. However, a self-employed SIMPLE IRA 3% employer contribution is business profit * 92.35% * 3%. I'm going to venture a guess that 50% of hand completed Form 1040s with self-employed SIMPLE IRA employer matches use business profit - 1/2 SE tax for the net earnings from self-employment and/or use 3%/103% for the contribution rate.