Catch-up with SEP & 401k

[DP]

One of my clients over age 50 made a 401k deferral of $16,000 for 2004 in his employer's plan ($13,000 plus $3,000 catchup).

The client also has a SEP plan from unrelated self-employment income. The client thinks he can receive another $3,000 catchup contribution from his SEP for 2004.

I say no, but his accountant says yes. Am I wrong? Thanks.

[mbozek]

Max catch up from all plans is 3k. (Catch up is only avaialbe in SAR-SEP, not a SEP).

[R. Butler]

Is it possible that the accountant is just using terminology incorrectly? Is this really a SARSEP? (I never actually seen a SARSEP; I know they exist, but you couldn't have a new one after '96 I think.) Is it possible that the accountant is saying that he can participate in his employer's plan & still fund a SEP from his unrelated business? If that is what the accountant is trying to say than he might be correct.

[DP]

I'm sure this is only a SEP because I was instrumental in getting it set up last year. This is a very aggressive accountant who likes to act on impulse and seek forgiveness later.

By the way, I do have one SAR-SEP that I administer for another of my older clients, and we do utilize the catch up contribution feature in this plan.

[R. Butler]

If its just a SEP your accountant could be correct, just the terminology that is being used is wrong.

[Appleby]

That sounds right …since the businesses are unrelated, the individual can contribute up to 20 % of his modified net profit to the SEP…This would not be a 'catch-up' contribution- it would be just a regular SEP contribution ( nonelective)

[DP]

The accountant was giving him a SEP contribution of 20% of his adjusted net profit. The $3,000 catch up was in addition to this 20% contribution.

I found out that the accountant went ahead and used the $3,000 catch-up in addition to the 20% SEP contribution on his 2004 return. Without the taxpayer undergoing an audit, how would the IRS ever catch the fact that he should not have received the $3,000 SEP catch-up?

[R. Butler]

Your accountant appears to be wrong. There would be no "catch-up" contribution to a SEP.

In the event of an audit the IRS will know something is wrong because the maxiumum contribution was exceeded.

[mbozek]

The IRS can kick out the tax return upon review after filing because the SEP deduction on line 32 of the 1040 exceeds 20% of the net earnings from SE on line 12. If net earnings from SE are 50, the max deductible contribution is 10, so the 13k deduction will be flagged when the return is processed and the 3k deduction will be denied. Its no different than exceeding the deduction for any other threshold (7.5% of AGI for deductible med expenses)

[Gary Lesser]

The best approach (to avoid the 6% and 10% annual excise taxes on the excess) would be to file an amended tax return (not claiming the deduction) and to remove the excess from the SEP-IRA (adjusted for gain/loss if after the due date).

[mbozek]

Why is it necessary to remove the excess contribution instead of amending the 04 return and carrying the excess contribution forward as a deduction for 05 as permitted under IRC 404(h)(1)© if the 3k SEP catchup was deposited in 05? IRS allows excess contributions to PS plans which are not deductibe for prior yr to be deducted as a contribution for yr in which it is made without imposition of penalty.

[jevd]

I believe even in a PSP that the 10% excise tax on non-deductible contributions would apply. In this case the contribution is considered a non-deductible SEP contribution and an excess IRA contribution unless recharacterized as a Traditional IRA contribution up to the limits.

The issue of deductibility as a traditional IRA contribution is a matter of AGI as the participant is covered by the SEP.

[mbozek]

I read 404(h)(1)(A) and (B) to require that contributions be deducted in the yr for which they are contributed unless claimed as a deduction the prior tax yr. There is no requirement that a contribution made by the date due for filing the prior yrs tax return be credited as a contribution for the prior yr. Therefore the contribution is deductable for the year in which it is made avoiding any excess contribution for the prior yr.

[jevd]

MBOZEK,

I agree. Failed to realize contribution was made in the window period. It isn't clear.

[Gary Lesser]

I agree with JEVD for the same reason (i.e., contribution made during window period). However, it does not appear to be a catch-up contribution for 2005 (just a regular elective until determined otherwise at end of year).

[Guest WantsToLearn]

What ifs someone is in two SIMPLE IRAs of unrelated unaffiliated employer and over age 50. How does catch-up limit apply?

THanks

[jevd]

What ifs someone is in two SIMPLE IRAs of unrelated unaffiliated employer and over age 50. How does catch-up limit apply?

THanks

Catch up contribuitions are on a taxpayer(individual) basis not plan.

[Guest WantsToLearn]

Thanks jevd.

Here is what I am confused about though. is the catch-up $2,500 or $5,000 for the two ( unleralted employers) SIMPLE? I am thinking the $2,500 is the plan limit, but the $5,000 is the individual limit. I looked and looked at the regs but still not sure

[jevd]

Thanks jevd.

Here is what I am confused about though. is the catch-up $2,500 or $5,000 for the two ( unleralted employers) SIMPLE? I am thinking the $2,500 is the plan limit, but the $5,000 is the individual limit. I looked and looked at the regs but still not sure

The 2006 & 2007 catch up limit is $2,500. Thats $ 2,500 per person regardless of the number of employers or plans. That is my understanding. The catch up contribution is an increase to the deferral limit which is an individual limit not a plan or employer limit.

[WDIK]

is the catch-up $2,500 or $5,000

Perhaps you are confusing the "401(k)" catch-up limit with the "Simple" catch-up limit.

[Guest WantsToLearn]

Thanks.

Here's what I am thinking.

One SIMPLE or SIMPLEs with related employers, the SIMPLE deferral limit of $10,500 applies

Two SIMPLES, with unrelated employers, the 402(g) limit applies- so between two SIMPLEs it is $15,500.

WHen you look at the catch-up regs- they say that the $2,500 aspply to the employer plan. I can't see anything that says either way ( yes or no), if we should follow-suit and apply the saem treatment, i.e. the higher limit. The regulations does not seem to be against that option. But it is not as claeat as 402(g)

So ,I am using logic- which proven to me to be dangerous, that if you aply the higher limit in one place, you apply it in both places.

I checked the SEP and SIMPLE answer book, and the IRS website too...but everything seems to say everything else, but none addessses that excat question

[Belgarath]

My interpretation is that the 5,000 limit would apply (2,500 per plan).

Do you actually have such a case with unrelated employers where a 50+ participant wants to double the catch-up, or is this merely an academic exercise?

[Guest WantsToLearn]

We have a case.

Thanks.

My boss says its $5,000 and gave me the regulation to give the client- which we usually do when we answer clients. But she is out on business - so a can't double check with her, and the client wanted me to check to be sure she did not think it was a 401(k). But I have never know her to be wrong- but misunderstandings can happen

Thank You very much

[jevd]

We have a case.

Thanks.

My boss says its $5,000 and gave me the regulation to give the client- which we usually do when we answer clients. But she is out on business - a can't double check with her, and the client wanted me to check to be sure she did not think it was a 401(k). But I have never know her to be wrong- but misunderstandings can happen

Thank You very much

Do you have the citation? If so please post for our edification>

[Guest WantsToLearn]

IRC 414(v) and the final regs at http://www.ustreas.gov/press/releases/repo...v)finalregs.doc

[jevd]

IRC 414(v) and the final regs at http://www.ustreas.gov/press/releases/repo...v)finalregs.doc

I Still maintain that the catch-up limit is a deferral and the deferral limits are individual limits and therefore the SIMPLE catch up limit is $ 2,500.00.

Please cite the specific section of this regulation that implies multiple plans of different employers allow for a SIMPLE Catch up contribution of more than $2,500.00

[Belgarath]

jevd - please take a look at 402(g)(1)©. For purposes of the 402(g) limit, the limit for catch-up contributions specifically refers ONLY to 414(v)(2)(B)(i). It does not reference (B)(ii). If it referred to (B)(ii) I would agree with you, but since the limit is (currently) specifically $5,000, then that's your answer. 414(v) and the accompanying regulations are dealing with individual plan limits, and the individual SIMPLE IRA must indeed limit any catch-up to the 2,500. But, if they are unrelated employers, then the total limit reverts to the limit specified in 402(g)(1)© - and hence to the 5,000 in 414(v)(2)(B)(i).

That's how I read it, anyway.

[jevd]

jevd - please take a look at 402(g)(1)©. For purposes of the 402(g) limit, the limit for catch-up contributions specifically refers ONLY to 414(v)(2)(B)(i). It does not reference (B)(ii). If it referred to (B)(ii) I would agree with you, but since the limit is (currently) specifically $5,000, then that's your answer. 414(v) and the accompanying regulations are dealing with individual plan limits, and the individual SIMPLE IRA must indeed limit any catch-up to the 2,500. But, if they are unrelated employers, then the total limit reverts to the limit specified in 402(g)(1)© - and hence to the 5,000 in 414(v)(2)(B)(i).

That's how I read it, anyway.

414(v)(2)(B)(i) states:

414(v)(2)(B)(i) In the case of an applicable employer plan other than a plan described in section 401(k)(11) or 408(p) the applicable dollar amount shall be determined in accordance with the following table:

Doesn't exception phrase apply?

If it doesn't then I think its a mistake that hasn't been caught and the possibility of the situation existing is rare although apparently has occurred inthis case.

That's my interpertation

[Belgarath]

Yeah, I saw that too - in fact, my initial reading was exactly the same as yours. I guess we'll just agree to disagree on this - after re-reading it, I still remain of the opinion that 402(g) language would have referred to (ii) if there was intent to limit the overall limit to the 2,500. 414 has to throw in (ii) because it is dealing with individual plan limits. Your interpretation is certainly safe, and may well be the correct reading.

Of course, wantstolearn probably has the only actual such case in the entire USA, so this is unlikely to generate a lot of controversy at any practical level.

[jevd]

Thanks Belgarath for your informative discussion. I appreciate your professionalism.

I agree this is probably the only case that will ever come up.

regards.

[Belgarath]

If the ground starts shaking, we'll know for sure that you are right!

Thanks for the comments. Ditto here. That's why these boards are so great - they force me to look at things through another pair of eyes, which are frequently sharper than mine.