part of HCE SEP contribution not made

[Guest mjn]

We have a small S-corp client with one HCE and several NHCEs. The client has had a SEP for several years.

He made timely SEP contributions for his NHCEs for 2003, but made only 75% of his own SEP contribution. His accountant assumed the full amount had been paid in and deducted it on his tax return. The client is usually very good about making the deposits; he probably just made a mistake in depositing less the required total for himself.

He made additional contributions in December 2004 (for the 2004 year). Can those be applied to the shortfall on the 2003 contributions? We're talking about $5,000 that wasn't deposited on time.

What are his options for making this right?

Thanks for your help!

[Gary Lesser]

One approach might be to treat contributions made in early 2004 as being for 2003 and so on. Technically, the plan failed for the 2003 year and all of the contributions (made for year to all employees) are excess nondeductible contributions. HOWEVER, assuming the "operational failure" to be "insignificant," self-correction--within the 2-year correction period-- under the EPCRS could be availed of.

If actual investment results are not able to be determined, then a reasonable rate of interest is used under the EPCRS.

See Rev Proc 2003-44, Section 9.

Taxes and penalties will be due on the excess deduction claimed for 2003. The make-up contribution will be currently deductible (or worse case, carried forward).

Hope this helps.

[Guest mjn]

Thanks, Gary.

I'll pull out that Rev Proc and discuss with the client's accountant.