C corp IRA issue

Submitted by Diane Ouellette on Mon, 2019-09-23 17:25

A new client has a small C Corp with 2 employees, the owner and an assistant. The owner made an IRA contribution of $5K for each of them for 2018, however, the owner’s funds went into a traditional IRA, and the assistant put $3500 into a Roth IRA for 2018 and $1500 towards a 2019 Roth IRA with a different custodian. The accountant for the C Corp rightly questioned the contributions while preparing the C Corp taxes due on October 15. I’m looking for suggestions on how to get the C Corp in compliance with these contributions made. I do have time to set up a SEP IRA plan, however, the assistant has already filed her 2018 personal taxes, and the assistant’s salary is less than 1/2 of the owner’s for the percentage contributions are inconsistent. I’d appreciate any and all suggestions on how to remedy this and allow for the C Corp to deduct the $10K. Thanks for your expertise.



Submitted by Alan - IRA critic on Mon, 2019-09-23 18:37

How many different calendar years did the assistant provide services from 2013-2017?   If less than 3, the 5305 could be adopted to exclude the assistant (require 3 out of last 5 years employment), then client can contribute for just his own SEP if he is on extension for 2018. He would then have to include what he already gave the assistant for retirement plan contributions in assistant’s salary and assistant’s Roth contributions would be OK if the assistant’s income or joint with spouse is not too high). There are no Roths allowed as part of a SEP, and also no way to recharacterize the Roth contributions already made by the assistant as SEP contributions ( a personal contribution to an employer contribution). 

Submitted by Diane Ouellette on Mon, 2019-09-23 23:35

Thanks for your thoughtful response.  The assistant has worked for the owner for more than 3 years.

Submitted by David Mertz on Mon, 2019-09-23 19:09

  • Any contributions made to regular traditional and Roth IRAs by the C corp on behalf of employees are wages paid to the employees that must be reported in box 1 of the employee’s W-2 for the year in which the contribution is made and the deduction on the C corp’s tax return will be reflected in the C corp’s wage expenses.  If these contributions were made in 2018 and not included on the 2018 W-2s, corrections and tax-return amendments will need to be made.
  • The employees must treat these contributions the same as if the employees themselves made the contributions.  In this case the owner will report on the owner’s individual 2018 tax return $5,000 of regular traditional IRA contributions (either as an IRA deduction or on Form 8606 as nondeductible) and the assistant will report $3,500 of regular traditional IRA contributions (either deductible or nondeductible) on their 2018 individual tax return.  The assistant can report the Roth IRA contribution on their 2019 tax return if it will result in any Retirement Savings Contributions Credit.
  • The assumption here is that each individual is eligible to make the IRA contribution(s), otherwise the result is an excess contribution by the individual.
  • Making these SEP contributions instead would require the individuals to obtain returns of contributions and give the money back to the C corp (or reduce remaining wages for the year) to avoid it being reportable as wages in box 1 of their W-2.  The C corp could then establish and contribute to a SEP plan for 2018 provided that the deadline for the C corp to establish and fund a SEP plan has not passed (October 15, 2019 since the C corp uses a calendar tax year and requested a filing extension).  As you noted, the SEP contribution amounts will be determined based on each employee’s compensation.  Of course the C corp could make SEP contributions in addition to the regular IRA contributions already made.  The individual’s 2018 tax returns will not be affected by these SEP contributions, only by returns of contributions.

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