Reporting and reversal of excess SEP contribution.

[Guest Bette N]

Last fall I advised a client to pay himself (president of an S corporation with a calendar year-end) a salary and to open a SEP. He opened and funded a SEP; however, he did not pay himself a salary all year. Therefore, the SEP has an excess contribution. If the contribution is withdrawn before June XX, 2001, there is a $140 bank penalty. Can we (1) extend his personal and corporation returns, (2) withdraw the excess funds in June, (3) pay the excise tax on the earnings only (4) redeposit all the money back into the corporation to reverse the transaction (in effect) and declare interest earnings? (5) If so, is the excise tax 6% or 10% and (6) is it reported on the corporate return? My interpretation is that the excess must be withdrawn by the due date of the corporate return, plus extensions, and that only the earnings will be subject to the excise tax. Thanks for your help.