senior moment RE DB and SEP

[thepensionmaven]

I believe you can't fund a defined benefit and a sEP in the same year.

I set up a DB for a client, in December 2023, have been following up for the date of the contribution, client finally returns my call only yesterday to find out he contributed $66,000 to a SEP in 2023.

I'm looking for a cite that addresses a DB and a SEP in the same year.  If need be, I'm going to have him transfer the $66,000 from the SEP.

[Bri]

Isn't that only if it's using the IRS Model SEP, that it then has to be the exclusive plan for the year?

[justanotheradmin]

they can have both - if the documents allow - the model SEP doc does not. 

If they do have both - the combined limits for 404 and such apply. 

I would be cautious of removing money from the SEP. 

The standard correction for a non-deductible contribution is an excise tax and carryforward, not removal of the excess unless it also violates 415 etc. 

[CuseFan]

In summary - SEP no if on 5305, yes if on another platform but limited to 6% of compensation (if PBGC-exempt) or 31% combined plan deduction limit applies. I see no legal basis for taking out the SEP contribution other than it being a withdrawal of a contribution which is already "in the books" and so you deal with the 31% limit and carry forward DB deduction to 2024. Depending on 2024 max, might need to do another carryforward in year two. All the related SEP coordination should have happened before DBP was adopted and, if it was and the client or advisor ignored, their problem not yours.

[Jakyasar]

CuseFan, how many times the clients told us that "oh by the way I have a SEP that I funded" after adopting the DB plan?

[thepensionmaven]

That is what I thought, but need a quote - I would think the SEP would be treated as a PS plan under 404, though technically the SEP is not a qualified plan under 401. That's what threw us off a bit.

Luckily, the SEP (with a bank, (5305 as they don't even know what an individually designed plan is) was done in 2024 so he can split the deduction between 2022 and 2023. 

Too many look to the morons at a bank to be experts and take their advice, and the banks just take client's money!

[CuseFan]

20 hours ago, Jakyasar said:

CuseFan, how many times the clients told us that "oh by the way I have a SEP that I funded" after adopting the DB plan?

I understand, and if you've asked about any other plans (including SIMPLE and SEP) ahead of time and made clear there are deduction coordination rules, then having their deduction limited by not disclosing such is on them.

[Gina Alsdorf]

On 9/11/2024 at 1:03 PM, justanotheradmin said:

they can have both - if the documents allow - the model SEP doc does not. 

If they do have both - the combined limits for 404 and such apply. 

I would be cautious of removing money from the SEP. 

The standard correction for a non-deductible contribution is an excise tax and carryforward, not removal of the excess unless it also violates 415 etc. 

My favorite answer to most questions, read the plan document.