SEP Under partnership
My client has a business under a partnership 50-50
My client opened his SEP IRA in 2019 and contributed to (not under the partnership but under my clients name with his Social Security number)
My client now wants to contribute to his SEP IRA for 2020.
however his partners CPA says that my client can’t contribute to his SEP, because his client did not open up an individual SEP IRA in 2019 or 2020…therefore the CPA is stating that my client can’t contribute to his own SEP.
Is his partner’s CPA correct or can my client still contribute to his own separate sep IRA even though his partner never opened opened one up?
Any help or guidelines on this?
thank you very much
Doug
Permalink Submitted by William Tuttle on Fri, 2021-04-09 03:12
You must first understand the difference between a SEP IRA plan and a SEP IRA account.
A SEP IRA plan can only be adopted by an employer.
A SEP IRA account is usually opened by the employee.
Only the employer can make employer contributions to an employee’s SEP IRA account from the employer’s business accounts.
The partnership is considered to be the employer of each of the partners. An individual partner is not an employer who may establish a SEP IRA plan with respect to his services to the partnership.
Your client was ineligible to adopt a SEP IRA plan for 2019 and ineligible to open and contribute to a SEP IRA account for 2019. This continues to be true for 2020.
Furthermore, since the client was ineligle to adopt and make a 2019 SEP IRA contribution. The client must remove all excess contributions and earnings subject to ordinary income taxes. The SEP IRA plan should be terminated.
With a 50:50 partnership, both partners must agree to have the Partnership adopt a SEP IRA plan. SEP IRA contributions must come from the Partnership’s business accounts. The partner’s K-1 will reduce their distribution by that amount.
Permalink Submitted by Douglas Bauerband on Fri, 2021-04-09 14:16
1. If he takes the money out that he contributed for 2019, he gets taxed on any gain and that would be for 2021 tax return correct? 2. does he have to redo his 2019 taxes because he got a tax deduction for contributing to his sep in 2019? 3. He and his partner SEP IRAs would be under their names and their Social Security numbers correct? 4. since his partner just opened up a sep IRA that means both cannot contribute for 2020 but can contribute for 2021 correct? 5. and if they do hire any employee they have to offer the sep IRA to them correct? Thank you for your helpDoug
Permalink Submitted by William Tuttle on Fri, 2021-04-09 23:00
The client should contact their SEP IRA custodian and inform them they were not an employer eligible to adopt and contribute to a SEP IRA plan for 2019.
The custonian will have a form for the removal of excess contributions and earnings. Both are taxable in the year of return and if < 59 1/2 and not subject to another exception, the 10% early withdrawal penalty on the earnings will apply.
You do not file an amended tax return for the year of contribution, because the current year taxation of the excess contribution offsets the contribution deduction.
Since the excess contribution was not removed by the 2019 extended due date (10/15/20), the employee is also subject to a 6% excise tax penalty (Form 5329 and the employer may be subject to a 10% excise tax penalty (Form 5330).
This is not a DIY correction. The client needs professional advice.
As I thought I already made clear the Partnership adopts the SEP IRA plan, the employee opens a SEP IRA account and the Partnership makes employer contributions at the exact same contribution percentage from employer business accounts.
Here again the other partner can not just adopt another SEP IRA Plan and account. That would be compounding the same mistake all over again.
The Partnership must adopt the SEP IRA plan. Since the Partnership 2020 tax filing deadline was 3/15/21, they can not adopt a 2020 SEP IRA if they have not filed an extension. If so, they have until 9/15 for the partnership to adopt a 2020 SEP IRA plan and make 2020 contributions.
All employees including partners must receive the exact same contribution percentage.
They really, really need to have a professional handle this. Why weren’t they listening to the Partnership’s CPA in the first place. The CPA seemed to know what they are talking about.
Most of this is covered in IRS Publication 560 and the IRS SEP IRA Fixit Guide.