SEP IRA AND SOLO 401K together in the same year?

Submitted by Keith Kim on Wed, 2022-11-09 04:13

Hello,
Thank you for your help in advance.
Business owner couple (no employees) already contributed max to A SEP based on their w2 amount. W2 is 20k and 100k. Is possible to set up a solo 401k and maximize employee contribution also?

Thank you!



Submitted by William Tuttle on Wed, 2022-11-09 12:48

  • A business can not maintain a 5305-SEP IRA for the same tax year they maintain a qualified plan (e.g. 401k).
  • E-Trade, Fidelity, TD Ameritrade and Vanguard offer a 5305-SEP IRA. Merrill Edge and Schwab offer a prototype SEP IRA that can coexist with a one-participant 401k.
  • While a 401k plan is maintained from adoption until termination. A SEP IRA is only maintained for a tax year contributions are made.
  • It would be messy, but technically you could:
  • ask for a return of the SEP IRA contributions and taxable earnings
  • adopt a one participant 401k plan and make employee deferral elections by 12/31/22.
  • W-2 employee deferrals must come from compensation not already received with a pay date by 12/31/22 and deposited in time to be reported by the W-2 filing deadline.
  • Employer contributions have until the tax filing deadline including extensions.

Submitted by Stacy Denton on Mon, 2022-11-14 14:55

Thank you in advance for any feedback.Client is 100% owner of S Corp (no employees), currently has SIMPLE IRA.  Also has Schedule C with a SEP set up at Schwab.  It appears to be a prototype, as the last page says “Prototype Sponsor – Schwab”.I believe the S Corp and Sch C businesses are a controlled group because of ownership (even though businesses are completely unrelated other than client ownership).  Therefore is not able to have both a SIMPLE and a SEP. Is this setup in error, and if so, could we get rid of the SIMPLE and do a solo 401k to coexist with the SEP if the SEP is in fact a prototype?

Submitted by William Tuttle on Mon, 2022-11-14 17:24

  • These two businesses are a Controlled Group and treated as one employer for employer retirement plan purposes.
  • A SIMPLE IRA can be the only employer retirement plan an employer has for a calendar year.
  • You can not do anything about the SIMPLE IRA adopted for 2022, not too mention it is past the 11/2/22 SIMPLE IRA notice/enrollment date for 2023. If the SIMPLE IRA was not terminated by 11/2, it has also been adopted for 2023. I don’t know if even this is reversible at this point.
  • The SEP IRA was never allowed, is disqualified and all 2022 (and possibly prior) employer contributions and taxable earnings returned.
  • Where this may get real messy. Is if the SEP IRA has non-owner/spouse employees.
  • The client should contact an ERISA attorney for advice.

Submitted by Stacy Denton on Tue, 2022-11-15 22:30

Thank you for the feedback.  The numbers are not that large, but were in 2 different years and the 6% penalty will obviously add up if discovered before being corrected.Thankfully no issue with any other employees.Client is trying to understand the risks of correcting/returning the SEP contributions (and earnings) and if they do, will they be able to move forward the the previously established SIMPLE plan.Are there any other risks we are not thinking about?

Submitted by William Tuttle on Wed, 2022-11-16 00:11

  • Unfortunately, this is an employer retirement plan and not a traditional IRA. It has a more complicated excess contribution correction procedure.
  • Requries submission of Form 5330 (not 5329) each year on any accumulating excess contribution balance and payment of a 10% excise tax.
  • All excess contributions and taxable earnings must be removed. There is no statue of limitations (SOL) on failure to file Form 5330.
  • Any tax returns within the applicable SOL with SEP IRA deductions must be amended to remove those deductions 
  • All earnings of excess contributions will be subject to ordinary income taxes.
  • I believe the returned taxable earnings may also be subject to the 10% early withdrawal penalty. Maybe Alan can comment on this and anything else.
  • I am not a professional and believe an employer retirement plans specialist should be engaged.

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