Contributed to SEP IRA and 401k Both

Submitted by Andrew Rogers on Tue, 2018-02-06 17:01

I have someone that has contributed to a SEP IRA throughout 2017. They then opened up a Solo 401k for the same business at the end of the year and put an employee deferral for themselves. They’d like to correct the SEP contributions so that they can complete the rest of the 401K employer contributions.

From my understanding, they can’t contribute to both. What is the best way to correct this? In my head, it seems that doing a excess deferral distribution based on the fact that they weren’t eligible for both. Then the 5498 and 1099r will wash out. However, would this also cause an issue with trying to defer the employer contribution into the Solo 401k?

Any help or other suggestions on a fix would help.

Thank you



Submitted by Alan - IRA critic on Tue, 2018-02-06 18:44

http://www.irafinancialgroup.com/can-i-make-contributions-to-both-a-sep-and-a-solo-401k-plan.phpYou may be thinking of a SIMPLE IRA. Since they can contribute to both a SEP and solo K for the same year, in this situation it would be easier to just let the SEP contribution replace the profit sharing contribution to the solo K. The 5498 will not cause a problem as long as the SEP contribution is no more than allowed. Max total contributions of 54k for 2017 disregarding catch up.

Submitted by David Mertz on Tue, 2018-02-06 19:07

The reference mentioned above omits the fact that a Form 5305-SEP based SEP plan is not permitted to be maintained in the same tax year as another type of plan.  Only if the SEP plan was established with different prototype SEP agreement can contributions be made to both for the same year.

Submitted by Andrew Rogers on Tue, 2018-02-06 19:29

I thought Form 5305 was required for all SEP plans.  Is that not correct?  If not, how do I confirm wether it’s a 5305 or not?

Submitted by David Mertz on Tue, 2018-02-06 20:25

You would need to look at the SEP agreement used to establish the SEP plan to see if it’s Form 5305-SEP.  Many plans are established using the Form 5305-SEP agreement, but some use other SEP agreements designed to meet the necessary requirements.

Submitted by William Tuttle on Tue, 2018-02-06 20:23

While the IRA Financial Group is technically correct. They are worng by significant ommission. Almost almost all SEP IRA plans are 5305-SEP.

  • You can not maintain a SEP-5305 and any other qualified plan except for another SEP. You can maintain a model SEP or an individually designed SEP. It is unlikely that anyone has the latter. The only model SEP plans I am aware of are at Schwab and Merrill Lynch. If the SEP IRA is at either of these providers, everything is fine and no action is required.
  • A SEP IRA at almost all other providers is a 5305-SEP.
  • If this was discovered prior to the end of the year, the SEP IRA plan could have been retroactively amended to a model SEP plan and the assets rolled over. However you can not amend a plan prior to 1/1 of the current year.
  • Since this was not discovered in 2017, the above is not possible. Disclaimer: I am not an employer retirement plan professional and you should probably consult one This is what I think the issues/solutions are.
  • After making 5305-SEP contributions. The individual was not eligible to make the 401k employee deferral. However, removing the excess deferral and earnings does not fully cure the error. Per the IRS, a 401k plan is “maintained” even if no contributions were made during the year.
  • However, a SEP IRA is only considered “maintained” in a year for which contributions are made.
  • I believe you should be able to do the following:
    • Remove all of the SEP IRA contributions and earnings as excess contributions. A removal of excess contributions is treated as if they never occurred. Therefore the SEP IRA was not maintained during 2017.
    • Additionally, since (now) there have been no employer contributions. They should be able to make their full employer contributions to the one-participant 401k.
  • Note:  It think this would be considered an insignificant operational error eligible for the Self-Correction Program (SCP). The SCP does not require contacting the IRS or paying any fee. You simply correct the error and keep records of such.
  • To qualify for the SCP you need to document that you have taken steps  to ensure the error will not happen again. I suggest they either rollover the SEP IRA assets to a traditional IRA or amend the SEP IRA to one of the model plans and rollover the assets to that plan or a traditional IRA. In either case terminate the 5305-SEP IRA.

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