403b and SEP

Submitted by Joy Soulier on Fri, 2018-10-12 20:22

This situation is that the individual worked for a large university hospital in 2016 and was enrolled in their 403b and 457 plans. She deferred 24k to each plan. She continued to have a sole proprietor business in 2016 and received quite a bit of self-employment income. She made a SEP contribution of roughly $45k for year 2016. We believe there was a employer match deposited in the 401b plan but she is likely not vested in the match. I have run across something which indicates that her 403b plan is considered controlled by the participant and is thus aggregated with any one participant plans she has, such as a SEP. If this is true, her SEP contribution limit should have been reduced by the 403b deferral and possibly by the employer match, even though she is not vested. Is this true? If this is true, how does one correct the situation? Does she need to amend 2016 or can she simply withdraw the excess contribution?
Thank you
Joy S



Submitted by Alan - IRA critic on Sat, 2018-10-13 02:40

  • Yes, the 53k annual additions limit per employer applies to both the 403b and the SEP because she is treated as her own employer with respect to the 403b plan as well as the SEP.  It does not matter if the match is not vested with respect to the matching contribution. The 2016 return will have to be amended to remove the deduction for the amount of SEP contributions to the extent the 53k limit is exceeded by contributions to both plans. EPCRS indicates the following choices for correction:
  • How to fix the mistake:Corrective action: There are two alternative methods to correct a failure to limit employer contributions to employees.The amount in excess of the annual limit, adjusted for earnings through the date of correction, should be distributed from the affected employee’s SEP-IRA and returned to the employer. The distributed amount is not included in the income of the affected employee, but is reported on Form 1099-R with a taxable amount of zero. If it isn’t feasible to determine what the actual investment results would’ve been, you may use a reasonable rate of interest, such as the interest rate used by the Department of Labor’s Voluntary Fiduciary Correction Program Online Calculator.Alternatively, if a submission is made under the VCP program, the excess amount may be retained in the SEP-IRA, but only if the plan sponsor pays an additional compliance fee of 10% of the excess amount, excluding earnings. Note that the additional compliance fee will not apply if the excess amount is under $100. Under both correction methods, the plan sponsor is not entitled to a deduction for the excess contributions.

Submitted by David Mertz on Sat, 2018-10-13 03:35

Since the elective deferrals were $24k, the $6k catch-up apparently applies to the 403(b).  Does that raise the $53k limit to $59k?  I think it would.

Submitted by Joy Soulier on Sat, 2018-10-13 18:30

this is probably not a good question to ask, but what are the chances that the IRS will catch thisThank youJoy S

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