Individual 401k profit-sharing plans
An individual contributed to their individual 401k profit sharing plan. They are the employer and the only employee. When he made the contribution in 2012, it was coded as an employee contribution for 2011 tax year. The CPA only reported a fraction of the contribution as a sep contribution for his 2011 tax return. (the individual didn’t make much money that year and the CPA didn’t realize what type of plan that he had set up) Since the contribution was made in 2012, the client decided to let it count as a 2012 contribution. Now that the CPA is doing the 2012 taxes, the client is showing a loss and does not have the abiliy to contribute to the plan for 2012.
In summary: The client has an over contribution to the plan and it was not deducted for 2011 or 2012. Can it be re-coded as an employer contribution and left in the plan to be used for future year contributions? If he pulls it out as excess contribution, what is the penalty? Is the distribution still taxable since it was never deducted on the tax return? (I know that the gain would be)
Any comments would be appreciated.
Permalink Submitted by Alan - IRA critic on Thu, 2013-07-25 18:18
If the contribution was made to a solo K plan, it cannot be reported as a SEP IRA contribution. The 2011 return must be amended to delete the SEP contribution since there were no SEP contributions made. It is also past the deadline to remove excess deferral amounts (if that applies) for 2011. so any excess deferral must be included in income for 2011. Since the deadline has passed any distribution would be taxed again, so best to leave it in the plan at this point. With respect to the amount of excess in the solo K, it must be determined how much was an employee deferral and how much was an employer profit sharing contribution and for which year.
Permalink Submitted by Thomas Prude on Thu, 2013-07-25 19:25
If the individual didn’t deduct the contribution in 2011, I don’t think it would still be taxable in 2011 as income?? The contribution was coded by the custodian as an employee contribution, so I am told that it needs to be removed as an excess contribution and will generate a 1099r. The custodian states that if it were an employer contriubtion that it needs to stay in the plan and used to offset future contributions. Does this sound correct?