SEP IRA question

Submitted by Jason Frank on Mon, 2016-11-28 15:00

I have two clients who are 50/50 owners of a company (an LLC) with around 15 employees. They have established and are contributing to a SIMPLE IRA plan.

They recently met with their accountant, who told them that they (the two owners) could also contribute to a SEP IRA and that they would NOT have to contribute on behalf of their employees. It has always been my understanding that a SEP had to be done for all employees and not just the owners. However, I readily admit that I am not an expert on SEP plans. Am I missing something? Can this be done somehow?

Thanks to anyone that can help!



Submitted by Alan - IRA critic on Mon, 2016-11-28 20:34

A SIMPLE IRA cannot be operated in addition to any other plan of the employer. Are they planning to replace the SIMPLE IRA with a SEP for 2017? If they do that, they will have to make contributions for all eligible employees as well.

Submitted by Jason Frank on Tue, 2016-11-29 14:04

Thank you for your response.  No, they are not planning to replace the SIMPLE with the SEP.  Their accountant specifically stated that they can have a SEP and another plan.  I guess I will have to ask him for proof that this can be done and see what he says.  

Submitted by David Mertz on Tue, 2016-11-29 16:11

  • Perhaps the accountant was suggesting that they make regular traditional IRA contributions, not SEP contributions.  If the custodian permits, regular contributions can be made to a SEP IRA account, but it must be made clear to the custodian that the contributions are regular IRA contributions, not SEP contributions, otherwise the custodian might report them incorrectly on Form 5498.  Depending on MAGI, a regular IRA contribution may or may not be deductible.  Regular IRA contributions cannot be made to a SIMPLE IRA account.
  • If the accountant is actually suggesting that SEP contributions can be made, it might be more straightforward to make the accountant aware of the statutes that prohibit what the accountant is suggesting:
  • § 408(p)(2)(D) dictates that a SIMPLE plan “may be the only plan of employer.”  Under § 408(p)(2)(D), the SIMPLE plan becomes disqualified for any year that a SEP plan is maintained.
  • With any SEP IRA, § 408(k)(2) requires the employer to make contributions for all eligible employees.
  • https://www.law.cornell.edu/uscode/text/26/408

Submitted by Jason Frank on Tue, 2016-11-29 19:23

Thank you, DMx.  It is good to have the specific statutes to reference!  I appreciate it!

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