Sep Ira

[peggysioux]

One of my client's employer formerly contributed funds into a Sep-Ira for client. Just found out today that in 2006, employer began issuing a check to employees and the employees deposited into their Sep-Ira accounts. Client received a letter from IRS stating client owed an addition $700 due to $4,600 in additional income. The additional income is because client did not make his contribution until 4/19/06. He thought he was making for 2005, bank submitted as 2006 due to date. I have a couple of questions:

1. Shouldn't the contribution be reflected on 1040, line 32 for IRA deduction or is a SEP IRA handled differently?

2. Taxpayer's W-2 for 2005 shows same income for box 1, box 3, and box 5 and nothing inputted for retirement plan, so wouldn't the $4,600 already be included in his income? So why would the IRS state the $4,600 is additional income?

3. Being taxpayer's $4,600 was applied to his 2006 Sep-Ira (unknown to taxpayer until today) and he also applied his check he received in April 2007 (prior to 4/16/07) to 2006 Sep-Ira, he will now be over 25% of his wages, so do I need to do an amended return filing a 8606 being a portion of his contribution will now be nondeductible?

Thank you for spelling this out for me; I am feeling very ignorant on exactly how to handle.

[peggysioux]

Sep-ira

Please ignore my first question, I thought it through and have determined that a Sep-Ira would not be included on employee's 1040. But I have a new question - if client didn't make the cut off date of 4/15 to apply to 2005, but still deposited the funds into the Sep-Ira for 2006, why would the additional income be added to his wages. I would understand if he did not deposit at all. Does anyone know what the steps are once an employer issues a check to employee for a Sep-Ira contribution. Does the bank notify the employer of the contributions and then the employer sends out amended W-2's for the employees that did not make the deposits into Sep-Ira accounts? Client does not recall receiving a amended W-2. Any input would be appreciated.

[Gene V]

I not good at explaining the answer you need; however, most of the information can be found in Pub. 560 and form 5305-A instruction. It depends on how the employers set up the plan; does he have fewer then 25 employees? Etc. One plan is the sep-ira deferral is not added to the employee wages, but is subject to SS tax.
I’m sure someone will give you a better answer.

[OldJack]

>>Just found out today that in 2006, employer began issuing a check to employees and the employees deposited into their Sep-Ira accounts.<<

It is questionable that this is a SEP-IRA deductible contribution as the employer has to make the contribution direct to a SEP-IRA account of the individual employee. A contribution actually must be paid to the trust or under the plan to be deductible [code §404(a)].

Under a SEP, you can contribute to an
employee’s traditional individual retirement
account or annuity (traditional IRA). You make
contributions directly to an IRA set up by or
for each employee with a bank, insurance
company, or other qualified financial
institution.

[Bees Knees]

It is questionable that this is a SEP-IRA deductible contribution as the employer has to make the contribution direct to a SEP-IRA account of the individual employee. A contribution actually must be paid to the trust or under the plan to be deductible [code §404(a)].

The employer would be making a direct contribution to the SEP-IRA if the check is made out to the SEP account trustee. The fact that the employee is physically taking possession of the check to hand deliver to the trustee does not disqualify it. What disqualifies the SEP contribution is if the employer makes the check out to the employee, who in turn writes a check out to the SEP trustee.

As to the 2005 or 2006 contribution issue, as long as it would qualify as a 2006 contribution, it should not be added to the employee's W-2.

Also, the deadline for the employer making the SEP contribution on behalf of its employees is the tax return due date, plus extensions. So if the employer issued checks made out to the trustee in 2006 for a 2005 contribution, the due date for depositing those funds for a 2005 contribution would be October 15, 2006, assuming the employer was a Schedule C or 1065 business and on extension, or September 15, 2006 if the employer was a corporation on extension.

The other issue here is why is IRS contacting the employee’s and telling them the SEP contributions are now wages? Probably because they have already dealt with the employer and determined that the SEP plan was disqualified. It may have nothing to do with making the contributions on time.

[dsi]

Did your client receive a separate w-2 or 1099 with the $4600 reported on it?

[peggysioux]

Sep-ira

Based on your explanations, it sounds like it is a disqualified plan as the employer did issue check in employee's name and the employee deposited monies into the his SEP-IRA. What I found odd was that the employee showed me the bank record of the deposit and the bank document shows depositing into a "SEP-IRA" account rather than a individual traditional IRA. Any ideas as to why the bank would handle in that way if the check was made out to taxpayer? Is it because a SEP-IRA account had been set up previously and he just deposited into same account?

The taxpayer is going to check with him employer today. But, if the plan was disqualified then wouldn't $4,000 of the $4,600 deposited be a IRA deduction and the remaining $600 be a non-deductible contribution and we just need to file an amended return making these adjustments.

[Bees Knees]

You can't make traditional IRA contributions to a SEP-IRA. If the account was originally set up as a SEP-IRA, the bank would have to transfer the funds to a tradiaional IRA before it could accept traditional IRA contributions.

[peggysioux]

Sep-ira

Pub 590 states "to deduct contributions for a year, you must make the contributions by the due date (including extensions) of the tax return for the year." If employer is on a calendar year and files tax return by the required date with no extension, do they still have until October 15 (extension date) of that year to make the SEP-IRA contribution or does contribution need to be made by April 15th unless request for extension made? Please clarify.

Thanks!

[OldJack]

Pub 590 states "to deduct contributions for a year, you must make the contributions by the due date (including extensions) of the tax return for the year." If employer is on a calendar year and files tax return by the required date with no extension, do they still have until October 15 (extension date) of that year to make the SEP-IRA contribution or does contribution need to be made by April 15th unless request for extension made? Please clarify.

Thanks!

No.. the return due date is extended with a valid return extension so the contribution due date is the return due date. No return extension.. no contribution date extension.