return of contribution revisited

[Gary]

An individual implements a DB plan in end of 2011.

The individual also is told by a financial advisor to set up a SEP and contribute 25%.

The individual comes to us the tpa and asks how much they can cotribute to db plan.

it seems the deductible limit for 2011 would be only 6% of comp and then excess contribution not deducted until later year.

Can the employer return contribution made to SEP (or all of it except 6% of comp amount) as a "mistake of fact" prior to 4/15 in accordance with 4972© and proceed to make the desired contribution to DB plan?

Does the return of SEP contribution satisfy 4972©(3)?

thanks

gary

[Effen]

you can't deduct a SEP contribution and a DB contribution during the same plan year, so one of them is improper. Seems to me if he funded the SEP, then it clearly exists and would be hard to claim it was a "mistake in fact", but that is a legal question. What fact did he mistaken?

I guess I would say the db never existed because it was not permitted because the SEP existed first. That said, if the accountant and attorney agree that the SEP was improper, I guess you could go the other way as well, but I wouldn't want to be the one to make that call. You also need the IRA Trustee to agree as well that it was a mistake, which isn't always easy.

Don't know why you are suggesting 6% would be permitted?

Safest play is revoke the db since nothing has been contributed or filed, and make it effective in 2012.

[frizzyguy]

you can't deduct a SEP contribution and a DB contribution during the same plan year, so one of them is improper.

You can deduct a SEP and a DB contribution during the same year. You may be thinking of the SIMPLE. You have to use a non-standardized SEP proto.

[AndyH]

you can't deduct a SEP contribution and a DB contribution during the same plan year, so one of them is improper.

You can deduct a SEP and a DB contribution during the same year. You may be thinking of the SIMPLE. You have to use a non-standardized SEP proto.

Isn't finding a non-standardized SEP like finding a Unicorn? This is an existing SEP apparently, so what are the chances that a non-standardized SEP was adopted? There was some discussion years back about the rarity of these on these boards.

But there is a 404(a)(7) issue here, so isn't the issue moot? There is already a 25% deduction.

[Gary]

yes, my understanding was that you couldn't have a SIMPLE and DB in same year, but it didn't apply to a SEP.

The combined plan 25% limit excludes the first 6% to DC plan so thus allowing 31% in total and that is where the additional 6% to DB come from.

Though still not sure if the SEP can be voided with contribution returned.

It does seem like using SEP for 2011 and DB beginning in 2012 is the route to take.

thanks

[frizzyguy]

Isn't finding a non-standardized SEP like finding a Unicorn? This is an existing SEP apparently, so what are the chances that a non-standardized SEP was adopted? There was some discussion years back about the rarity of these on these boards.

Haha, you're 100% right. I went chasing after one several months ago during an audit. We thought our client was a non-amender because the advisor who sold and "administered" the plan said there wasn't a timely EGTRRA restatement. We had another issue come up later and the advisor said something to the effect of "I think there might be something in the stack of adoption agreements in the client's file that addresses this"...

My response was "Ummmm, what adoption agreements?" I told him to scan everything and send it over and because of when the client changed custodians he had not one, but two timely adopted EGTRRA restatments. The auditor luckily had a chuckle at the advisors expense and wasn't frustrated. I think both ML and Schwab have them.

If you want to see your client's face go pale white, show them a quote from an attorney to do an individually designed SEP document.

[AndyH]

If you want to see your client's face go pale white, show them a quote from an attorney to do an individually designed SEP document.

But it increases the deduction so it doesn't matter - the old 412(i) argument.

[Effen]

From the IRS website:

If an employer has a SEP, can it also have other retirement plans?

An employer can maintain both a SEP and another plan. However, unless the other plan is also a SEP, the employer cannot use Form 5305-SEP; the employer must adopt either a prototype SEP or an individually designed SEP.

From the 5305-SEP instructions:

When not to use Form 5305-SEP. Do not use this form if you:

1. Currently maintain any other qualified retirement plan. This does not prevent youfrom maintaining another SEP.

Is it a prototype SEP or an indvidually designed SEP? If not, then it can't have a db plan at the same time.

[JAY21]

I don't think a prototype SEP and a SEP on the IRS Model Form 5305 are necessarily the same thing.

Most of your investment companies have prototype SEPs that do NOT use the IRS Model Form 5305. It's my understanding that sponsors of these prototype SEPs (but NOT Model SEPs) can then sponsor another qualified plans.

[frizzyguy]

I don't think a prototype SEP and a SEP on the IRS Model Form 5305 are necessarily the same thing.

Most of your investment companies have prototype SEPs that do NOT use the IRS Model Form 5305. It's my understanding that sponsors of these prototype SEPs (but NOT Model SEPs) can then sponsor another qualified plans.

I think the main thing is just to make sure the plan allows it. I have little expirience with SEPs and I really don't see that changing.