Rollover from a Ind 401K

Submitted by Kevin O'Hearn on Thu, 2020-05-28 12:41

Hello, I have a client processed a full journal from a SEP IRA with my company to a Ind 401K which is also with my company in 09/10/2018. $24,500 was IRA contributions with basis that should have never been moved from the SEP IRA and needs to be returned. Client is 54 and there is no triggering event to move the $24,500 from the Ind 401K to the SEP IRA.

The plan document says participants can distribute any rollover assets at any time. Do you know if there is any guidance on this movement?

Thank you.

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Permalink Submitted by Alan - IRA critic on Thu, 2020-05-28 14:59

EPCRS refers to ineligible rollover amounts as “excess amounts” in the plan, but does not specify a corrective preocedure. However, RR 2014-9 states the following: “If the plan administrator for the receiving plan later determines that the contribution was an invalid rollover contribution, the plan administrator must distribute the amount of the invalid rollover contribution, plus any earnings attributable thereto, to the employee within a reasonable time after such determination.”
Was is the nature of the “basis” rolled into the solo K? Was this an excess SEP contribution that exceeded the SEP deduction limit and subject to the 10% excise tax, or was it derived from a non deductible TIRA contribution? Does client have any other non Roth IRA accounts? Want to be sure that the 24,500 is actually after tax money, since there are two types of basis that could be in a SEP IRA.

Permalink Submitted by Kevin O'Hearn on Thu, 2020-05-28 15:09

The $24,500 should have remained in the SEP IRA as they were traditional contributions made yearly from 2012 thru 2017 and now the client is trying to move the $24,500 from the Ind 401K to thier traditional IRA via partial rollover with the goal of doing a backdoor Roth conversion.

Permalink Submitted by Alan - IRA critic on Thu, 2020-05-28 17:07

So these were NOT SEP IRA contributions deducted on Form 1040, but rather were non deductible TIRA contributions made to the SEP IRA account?

Permalink Submitted by Kevin O'Hearn on Thu, 2020-05-28 17:22

Yes, from what the CPA is telling me they were non deductible TIRA contributions made to the SEP IRA account.

Permalink Submitted by Alan - IRA critic on Thu, 2020-05-28 18:35

Good, because the complications are fewer in this case. The solo K does not need any triggering event to distribute the 24,500 excess amount (adjusted for earnings) to the client. Only the earnings (if any) would be taxable and subject to 10% penalty (see my earlier post).
But that should be the easy part. The solo K will issue a 1099R reporting the distribution with either Code E or other excess contribution distribution code, and these are NOT eligible for rollover. Therefore, the client cannot get this money back into an IRA from which to do the tax free conversion. And if client took the position that they are just rolling over part of the 2018 distribution from the SEP IRA instead of the solo K distribution, the 60 day deadline is long gone. A real long shot might be to utilize Rev Procedure 2016-47 to extend the 60 day rollover deadline, but client would have to talk the IRA custodian into accepting a rollover. If the custodian accepts it they should report it on Form 5498, box 13a. Given all these contingencies, probably best client just settles for getting his 24,500 back, tax free.

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