SEP contributions by employee

[Jesse]

Taxpayers W-2 reports an amount in box 12 code F: Elective deferrals to 408(k)(6) SEP. Yesterday, out of the blue, a CFP calls and tells me the taxpayer cannot contribute money into their SEP unless it was set up prior to 1997, which is impossible as business only existed since 2001.

I have found information on what the employer can contribute but am at a loss whether the employee can or cannot also contribute. I am totally illiterate concerning SEP's, can anyone point me in the right direction?

I suggested they talk to the company's bookkeeper and/or plan administrator as I would think they would have to correct the error?

[RLymanC]

Sep-ira

A SEP IRA plan can be established by a business owner with employees. A SEP IRA is funded 100% by the employer, employees do not contribute, however employee's may establish and contribute to their own personal IRA.

[Jesse]

So do you think either:

1.) The W-2 is incorrect, as none of the employer contributions are reported in the W-2.

OR

2.) The employer is taking out contributions from the employee and making the ineligible contributions on the employees behalf.

If #2, this needs to be corrected ASAP!
Wouldn't you think the plan administrator would know this?

[Jiggers]

Sarseps

SARSEPS cannot be established after 1996.

See TTB 13-2.

An employee cannot contribute to a SEP if the plan was established after 1996.

Only an employer can contribute.

So there cannot be any deferred comp shown on the W-2 as a SARSEP.

Your client needs to get information from his employer.

The W-2 might be incorrect.

[RLymanC]

Googled this

A 408(k) plan is an employer-maintained retirement plan, often referred to as a Simplified Employee Pension (SEP). "408(k)" actually refers to the part of the Internal Revenue Code that provides for SEP. In a 408(k) plan, the employer and the employee both contribute to a retirement account, though the employee is the actual owner of the account. This makes the 408(k) plan similar to a 401(k), but the 408(k) plan is actually a little simpler. It is only available to companies with under 25 employees - including the self-employed - and allows employees to contribute to their 408(k) plan with pre-tax dollars. A 408(k) plan does have annual contribution limits, but the employee pays no taxes on the employer's contributions. The contributions on all earnings in the 408(k) plan are tax-deferred until withdrawn.

As I understand it, the employee can not contribute to the SEP-IRA but 408(k) OK

[JON]

When

the Simple came in new SARSEPs went away.

[Bees Knees]

A 408(k) plan is an employer-maintained retirement plan, often referred to as a Simplified Employee Pension (SEP). "408(k)" actually refers to the part of the Internal Revenue Code that provides for SEP. In a 408(k) plan, the employer and the employee both contribute to a retirement account, though the employee is the actual owner of the account. This makes the 408(k) plan similar to a 401(k), but the 408(k) plan is actually a little simpler. It is only available to companies with under 25 employees - including the self-employed - and allows employees to contribute to their 408(k) plan with pre-tax dollars. A 408(k) plan does have annual contribution limits, but the employee pays no taxes on the employer's contributions. The contributions on all earnings in the 408(k) plan are tax-deferred until withdrawn.

As I understand it, the employee can not contribute to the SEP-IRA but 408(k) OK

NO.

A 408(k) is a SEP, but only SARSEPs established prior to 1997 can continue to accept employee contributions. See IRC Section 408(k)(6)(H).

A SIMPLE plan is a plan under IRC Section 408(p). A SIMPLE is like a 401(k) plan that can accept employee contributions.

If you have a 408(k) plan, established after 1996, and it accepts employee contributions, it is disqualified under the code and all contributions are taxable to the employee.