SEP final year

[Guest 5500]

7/31 fiscal year C Corp has SEP on calender year basis. Deductible limit for 7/31/2004 is based on compensation during 2003 calender year. Corporation liquidates on 7/31/2004.

Is there any way to make SEP contributions based on the wages paid 1/1/04 - 7/31/04? Seems if they are funded before liquidation, they would be excess contributions since the 7/31/04 limit was already reached based on calender year 2003 wages. The excess contributions would not be deductible and would be available for carryover, but there is no next year. I assume the carryover deductions are lost.

The employee cannot exclude these contributions made during 2004 and has to withdraw the excess contribution. The distribution of the excess contribution is not taxable since it was already included in wages. 72(t) is not an issue since employee is over 59 1/2. The 415 limits have not been exceeded.

I would like to make sure there is no way to leave the contributions in the employee's SEP. Is there a better solution than my understanding above.

[Gary Lesser]

None. Your interpretation is correct. If funds left in IRAs, the 6 percent penalty would apply untill corrected (by removal or undercontribution).

Even if the SEP plan year were changed to the taxpayer's fiscal year, the CY deduction rule would still apply to limit the deduction.