Nondeductible SEP contribution refundable?

[Guest B'Etor]

I have a client with a defined benefit plan and a SEP. Due to the limitations of 404(a)(7) the SEP contribution they made last year is not deductible. While I understand that the deduction can be carried forward, in reality we expect the defined benefit plan to continue and thus we may never get to a point where the SEP contribution can be deducted.

Is there any way that anyone can think of to get that SEP contribution back to the employer, since it will never be deductible?

[Gary Lesser]

Absent a fraudulent transfer situation, the employer has no recourse to recover the contributions. However, it may be possible to delay a portion of the DB contribution to permit the deduction of the SEP carryforward and thereby eliminate the cummulative 10 percent penalty on the nondeductible contribution.

If any amount (elective or nonelective, or gain) is returned to the employER, both the employer and trustee/custodian have entered into a prohibited transaction under the Code and under ERISA (if plan subject to ERISA). They may also be liable for theft, conversion, and possibly breach of fiduciary duty under state law.

Hope this helps the Klingon Empire. [Nice suit. ]

[Guest B'Etor]

Thank you. Do'Ha' ("That is unfortunate" in Klingon).

[Belgarath]

As one who became a Trekkie from the original series, I sometimes still have difficulty remembering that the Klingons are allies. However, since we still have the Romulans (with the recent addition of the Ferengi and the Borg) as the bad guys, I'll agree with Gary in hoping that the Klingon Empire can benefit from his response.

[Gary Lesser]

Just an additional thought if the plan is just a SARSEP and not top-heavy.

Since the repeal of Code Section 415(e), the maximum employer deduction in a combination of defined benefit and defined contribution plans—including a SEP, a SARSEP, or a SIMPLE—is the greater of 25 percent of the participant’s compensation or the amount necessary to fund the defined benefit plan. The JCWAA made a change to allow a contribution to a plan that accepts only elective deferrals not to be included in the maximum employer deduction described above. In other words, the defined benefit plan’s “contribution” for the year could exceed 25 percent of a participant’s compensation and the participant would still be permitted to make an elective deferral to a defined contribution plan (including a SARSEP that is not top heavy).

[Guest B'Etor]

Unfortunately it was not a SARSEP.

I am grateful the tax laws are simpler on Qo'noS.

[jevd]

Check IRS PUB 560 top of page 6 third column regarding excess SEP contributions. They are considered employee contributions subject to Traditional IRA contribution limits and rules for return. They are also considered income to the employee. That still doesn't allow a return to the employer.

[Gary Lesser]

Jevd, The amounts here are not excesses 'participant' contributions, just excess nondeductible contributions. Thus, they are not treated as "excess SEP contributions" subject to traditional IRA limits. I.e., the amounts conrtributed are within applicable limits--and if it were not for the funding of the DB plan--would be deductible.

[jevd]

Thanks for the clarification.