Over Contribution to SEP

[taxtoddnyc]

Would love an opinion or two on this, as I can't seem to find a definitive answer...

Self employed client contributed maximum to a SEP-IRA, but then we amended her Schedule C to account for more expenses, which reduced the profit and hence the max SEP amount. Since the 5329 doesn't seem to have a place to account for the over contribution (and the excise tax) on a SEP as it does for a "regular" IRA, I'm just wondering if there is a form that performs the same function for a SEP. Also, can the client just pay the tax and leave in the over-contribution, or does she have to withdraw the overage as well?

Thanks for your help...

[OldJack]

SEP-IRA tax deduction for a self-employed person is based upon calculation and timely payment made not later than the due date of the properly prepared tax return including extensions. Therefore, (IMHO without research) calculation of SE person's maximum allowed or SEP deduction is not changed/amended when you file an amended 1040 tax return after the deductible/calculation payment period. Obviously this would not be the case if this was intentionally done as a plan to avoid taxes.

[jainen]

>>this would not be the case if this was intentionally done as a plan to avoid taxes<<

This statement punches a pretty big hole in the argument. Presumably the business owner knew or should have known about business expenses, so how could you say she was not tax-motivated if failing to report them generates a big tax break?

I concede that for employees and even the owner in a complicated business, you sometimes don't find out about an excess contribution until after the books are closed at year end. That's why Form 1099-R has codes D and P. You aren't allowed to say "whoops" and still claim the deduction. You have to treat it as an excess contribution if you later learn that it was an excess contribution.

To answer the questions in the original post, the instructions to Form 5329 (we do read instructions, don't we?) specifically includes SEPs in its definition of traditional IRA. Taxtoddnyc's reference to a "regular" IRA is not supported in that regard. The one positive interpretation I can offer is that, yes, an excess contribution can be applied to a later year rather than withdrawn, subject to the 6% penalty.

I'm most troubled by the suggestion that we can amend selected parts of a tax return without carrying the results to all the related forms and lines. I can't figure out where that idea comes from.

[OldJack]

A SEP is a qualified defined contribution plan under code §408k and for Self-employed/employer tax deduction purposes is *not* an IRA (note the separate line 28 v. line 32 for an IRA on the 1040). For tax purposes the "beneficiary" of distributions from a SEP-IRA account is treated under "traditional IRA" rules, thus the penalty on form 5329 for early distribution. The beneficiary is not the one that determines the tax deduction calculation. When you amend a corporate employer 1120 (such as a NOL carryback), you don't go back and recalculate employee SEP contributions.

[jainen]

>>When you amend a corporate employer 1120 (such as a NOL carryback), you don't go back and recalculate employee SEP contributions.<<

I suppose that's true. Corporations can't have SEPs so you must be talking about the $45000 limit for all of an employee's defined contribution plans. If I have two jobs and one company recalculates my compensation for some reason, I wouldn't go to the other company a year later and make them redo their 401(k).

But this thread (or at least my posts) aren't about the $45000 max, but the 20% calculation. I don't think you can bump up your retirement fund by conveniently forgetting lots of ordinary and necessary expenses which you conveniently remember later, no matter how sincerely you smile.

[MJG CPA]

I had something similar a few years back. I was calculating the SEP contribution for a new client (s-corp sole shareholder) and wondering why this year's contribution was so much less than the prior year's contribution. Turned out the prior year was calculated incorrectly. In coming to this conclusion, I was in contact with the Plan Trustee and once they became aware of it, they insisted the excess be removed or applied to another year. We amended the return for the year in question, carried forward some of the excess, but also had to remove a large chunk.

[OldJack]

Corporations can't have SEPs so you must be talking about the $45000 limit for all of an employee's defined contribution plans..

Well... I have C-corps and S-corps that have for years made deductible contributions for employees under an adopted SEP plan. I don't know where you got the idea that a corporation can't have a SEP plan. You have to understand that a SEP plan is adopted only by an employer (self-employed employer) and that is not the same status/hat as the indivdual person filing a 1040 tax return.

[RoyDaleOne]

Contribution in excess of the amount permitted may be carried over and deducted by the employer in succeeding taxable years, subject to the deduction limit. "Code Section 404(h)(1)©".

Excess contributions will constitute current income to employees and, if not withdrawn, are subject to a 10 percent excise tax. "Code Section 4979(a)".

Form 5330, "Return of Excise Taxes Related to Employee Benefit Plans." may be required.