Owner Contributing to SEP

[coleboy]

Hi,

I have a client who is a sole proprietor who set up a 401k plan a few years ago. We took over the plan last year.

Apparently back in early 2015, her accountant told her that she could not participate in the 401k plan as a sole proprietor. Her financial adviser then set up a SEP for her only. Now her new accountant told her that this is wrong and she needs to put that contribution into the 401k plan and get rid of the SEP.

My question is that can we move her money from the SEP to the 401k and count the $18,000 contribution as if it was made to the 401k for 2015?

She wants to get the $18000 contribution that she made to the SEP into the 401k plan so she can get the SH match.

[Lou S.]

Is 2015 the only year effected or by "early 2015" does that mean the 2014 contribution was problematic too?

Are there any employee besides the owner who qualifies for the SEP?

Has the 2015 contribution already been deposited to the SEP?

Assuming only 2015 is effected and the money has been deposited, I think the IRS would take your proposed correction to close the SEP and transfer to the 401(k) as an acceptable correction. However, I think you will need a VCP filing to get the IRS blessing as this does not appear to fall under self correction and it is possible the IRS may want the $18,000 contribution classified as a profit sharing contribution which could raise other issues and not a 401(k) contribution. If you have evidence of prior 401(k) contributions for the sole prop to the 401(k) in years before 2014 and an intention to continue make a 401(k) contribution for 2015 absent the poor advice from the accountant that might bolster your case to have the transferred funds treated as a salary deferral.

Though maybe someone who handles more IRS VCP submissions can you a better feel if this is an acceptable correction.

[coleboy]

I don't have any details on the SEP but I would think that the money she put in would be considered an employer contribution which should be allocated to other eligible employees. Since SEP's only allow for employer contributions, could she then make an additional employee contribution to the 401k side for herself?

[Bird]

I'd say the SEP contribution was very clearly an employer discretionary-type contribution. The fix would be to make equivalent percentage contributions for the employees, to the SEP. If there are different eligibility requirements for the SEP and 401(k), then...well, top heavy issues come to mind, if nothing else.

I don't see how the money could be moved to the 401(k) as if it were a contribution, of any kind, but especially not as an employee contribution. And I don't see how she could now make a 401(k) (employee) contribution, unless she had an election in place on 12/31/15.

I don't know if the IRS would see it differently in a VCP submission.

[Earl]

the contribution was not made pursuant to a written election to defer under 401k.

I would not make the 401k argument regardless of the similarity of the hypothetical result.