SEP Question

[delstvn]

Hello,
I have a new tax client that for the last 4 years has been self employed and contributed to a SEP plan each year. In 2008, instead of being listed as a consultant for the company and issued a 1099, he received a W-2.

However, his employer made contributions to his previously established SEP account on his behalf.

Since he is not self-employed, technically, anymore, am I correct in assuming that this contribution cannot be done and that he needs to remove the funds from that SEP account prior to October 15th - the final extension date. Can he roll these funds into a Roth IRA instead?

I have asked the IRS for guidance on this issue and they can't give me any definitive kind of answer as to what to do with the funds contributed in 2008 for him.

Appreciate any guidance or suggestions.

Thanks.

[Kram BergGold]

I learned this at the IRS Tax Forum

Send your question via email to
retirementplanquestions@irs.gov

[Bees Knees]

An employer can contribute SEP money to an employee’s SEP IRA, provided the employer does not discriminate against any other qualified employee.

In other words, if the employer contributed the same percentage of compensation to the SEP IRA of all employees, then everything should be fine. If the employer only contributed SEP money to your client but no other employee, then there is a problem.

The fact that the SEP IRA account itself was previously set up by your client at a time when he/she was making SEP IRA contributions as a self employed individual should make no difference. As long as the account is a SEP IRA, a new employer with a SEP plan should be able to make contributions to it.

[JON]

No matter

what I do not think your client, the employee, would have a problem. The employer has to have a company SEP plan and make the proper contributions to all who qualify.

[ChEAr$]

Hello,
I have a new tax client that for the last 4 years has been self employed and contributed to a SEP plan each year. In 2008, instead of being listed as a consultant for the company and issued a 1099, he received a W-2.

However, his employer made contributions to his previously established SEP account on his behalf.

Since he is not self-employed, technically, anymore, am I correct in assuming that this contribution cannot be done and that he needs to remove the funds from that SEP account prior to October 15th - the final extension date. Can he roll these funds into a Roth IRA instead?

I have asked the IRS for guidance on this issue and they can't give me any definitive kind of answer as to what to do with the funds contributed in 2008 for him.

Appreciate any guidance or suggestions.

Thanks.

What you didn't say in second paragraph above is whether or not employer has an
active SEP plan in effect. Bees has addressed the question IF employer does have such a plan.

But if no, then any contributions by the employer into the IRA (not the SEP of the
employee) will be taxable income and the accompanying deduction limited to the
5,000/6000.

Remember, a SEP plan is established by an employer and contributions are made
into employees' own IRA's.

[delstvn]

Thank You - 1 More Question

Thank you all for your response.

One last question - his deduction, since he has no other retirement plan, would be limited to the $5,000/$6,000 - correct? It looks like the contribution was added to his W-2 as income.

Someone in his office is telling him that he can take the full amount contributed by his employer as a SEP deduction on his 1040 (amount contributed was $20K). He has enough income to support the $20K deduction but, since he is not self-employed , I can't see how this would be acceptable.

Thanks.

[Bees Knees]

You haven’t answered the question of whether or not the employer has a SEP plan.

[delstvn]

Sorry

Sorry - he is not sure if the employer has a SEP plan or not. He was not given any other option except for the employer to contribute to his previously set up plan.

Hope that helps.

[Bees Knees]

Well, as I said before. If the employer does have a SEP plan, then the contribution by the employer into his SEP is not taxable. If the employer does not have a SEP plan, then the contribution by the employer into his SEP is taxable. Assuming the employer does not have a SEP and it is taxable, your client has an excess contribution to his SEP, subject to excess contribution penalties each year the contribution remains in the SEP. Having the employer add it to the employee's W-2 and subjecting the contribution to tax does not in itself allow the money to remain inside the SEP, because a SEP is a tax deferred account. The money cannot stay in the SEP account unless your client pays the excess contribution penalty each year.

I think your client needs to ask his/her employer some questions.

[delstvn]

Thanks for your reply.

Am I correct in that any amount over the $5K/$6K (no employer sep) needs to be removed from his IRA account before 10/15 or he will be subject to penalty?

And, if his employer does have a SEP, then there is no deduction available to him.

Just trying to cover all my bases - I will ask my client to get more info but that hasn't been too successful in the past.

Thanks for all your help.

[Bees Knees]

If the account is an IRA, then the excess over $5K/$6K needs to be withdrawn prior to the extended due date of the return (Oct 15), provided the contribution was contributed by the employer prior to April 15th of this year. Assuming it is an IRA and the employer does not have a SEP, the employee can then treat the $5k/$6K as an IRA contribution.

[JohnH]

Thanks for your reply.

Am I correct in that any amount over the $5K/$6K (no employer sep) needs to be removed from his IRA account before 10/15 or he will be subject to penalty?

And, if his employer does have a SEP, then there is no deduction available to him.

Just trying to cover all my bases - I will ask my client to get more info but that hasn't been too successful in the past.

Thanks for all your help.

The vague manner in which the client gives you information makes me wonder if he already knows he isn't dong things correctly and he's trying to use you as a foil just in case a problem arises. You may need to take steps to be sure he doesn't try to blame you if the situation blows up in his face a couple of years from now. Get it right, and document everything.

[delstvn]

Thanks

To John H & Bees Knees (and all the rest) -

Thank you for your help. I agree - this is turning out to be somewhat of a cagey client so I will be sure to document.

All of your advice has been great. I had posed these same questions to the IRS with no answer able to be given. It was kicked up the chain but no response as of yet and that was from 3 weeks ago.

You guys are great!

[dsi]

Have you directly asked your client the very important question? That is, does his employer have a SEP? If your client refuses to answer this question, you should think twice before you accept this engagement.

[delstvn]

I sent an email to my client last night and he responded this morning.

He tells me the employer does have a SEP plan so I think my problem is solved. The employer made the payment on his behalf into his SEP plan and he makes enough money so that the amount was not an issue.

Of course, he also wanted to take the deduction on his tax return as a SEP too because he feels he is still self-employed.

Don't you just love it!

Thanks for all the helpful comments.