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How to get out of SEP-IRA

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  • Avatar CyberKnife19 
    Participant
    Status: Physician
    Posts: 3
    Joined: 12/03/2017

    So, I made a rookie mistake that I would greatly appreciate some help getting out of…

    Long story short, I contributed to a SEP-IRA in early January of 2019 and now realize that I am not allowed to because I did not set up a SEP-IRA for our 4 employees.  It’s complicated, but basically the employees work at a satellite clinic which I thought was under a different umbrella, but it turns out that they are under our umbrella and so technically are our employees.

    It’s further complicated by the fact that in May of 2019, our group (3 docs) opened up a 401k for them and us (and CBP for us), so I don’t think I can just open up a SEP-IRA for them at this point.

    Any thoughts or advice would be greatly appreciated as to how I can get out of my SEP-IRA or not get into trouble with the IRS when I file my taxes for 2019.

    Thank you very much.

    #241530 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2374
    Joined: 03/01/2018

    presume you consulted a professional that helped set up the 401k and CBP. Have you discussed with them?

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #241532 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1903
    Joined: 02/01/2016

    This is one and possibly two SEP IRA plan errors if it was a 5305-SEP IRA and the contribution was “for” the 2019 tax year. I am not a TPA and as @jacoavlu suggested you should probably engage one to verify the proper corrective action. This is not something that most CPAs/CFPs would have any detailed knowledge of.

    The IRS has very specific guidance on how to correct plan errors under the Employee Plans Compliance Resolution System (EPCRS). There are three ways to correct mistakes under the EPCRS:

    1. Self-Correction Program (SCP) – permits a plan sponsor to correct certain plan failures without contacting the IRS or paying any fee.
    2. Voluntary Correction Program (VCP) – permits a plan sponsor to, any time before audit, pay a fee and receive IRS approval for correction of plan failures.
    3. Audit Closing Agreement Program (Audit CAP) – permits a plan sponsor to pay a sanction and correct a plan failure while the plan is under audit.

    It is likely that these would be considered insignificant operational failures eligible to be corrected under the SCP. You do it yourself, with no notice/fee to the IRS and document it in the plans records with a promise to not do it again.

    Normally, if eligible employees were excluded from participating, you should make corrective contributions that would place affected employees in the position they would’ve been in if there were no operational plan mistakes.

    However, maybe because the deadlines have not passed, you could remove any contributions and associated earnings from the SEP IRA as excess contributions. This would treat the contributions as if they had never been made and since a SEP-IRA is only “maintained” for a tax year that contributions have been made. There is no plan error of maintaining a 5305-SEP IRA and qualified plan (401k) for the same tax year.

    If this is a self-employed business, the deadline to remove excess contributions is the tax filing deadline (~4/15) including extensions (~10/15). If this is a corporate business, the deadline to remove excess contributions is the tax filing deadline (~3/15) including extensions (~9/15). So don’t delay.

    #241538 Reply
    Liked by jfoxcpacfp, Peds
    Kon Litovsky Kon Litovsky 
    Participant
    Status: Financial Advisor
    Posts: 920
    Joined: 01/09/2016

    So, I made a rookie mistake that I would greatly appreciate some help getting out of…

    Long story short, I contributed to a SEP-IRA in early January of 2019 and now realize that I am not allowed to because I did not set up a SEP-IRA for our 4 employees.  It’s complicated, but basically the employees work at a satellite clinic which I thought was under a different umbrella, but it turns out that they are under our umbrella and so technically are our employees.

    It’s further complicated by the fact that in May of 2019, our group (3 docs) opened up a 401k for them and us (and CBP for us), so I don’t think I can just open up a SEP-IRA for them at this point.

    Any thoughts or advice would be greatly appreciated as to how I can get out of my SEP-IRA or not get into trouble with the IRS when I file my taxes for 2019.

    Thank you very much.

    Click to expand…

    Do you mean that your businesses form a controlled and/or affiliated group?  “Under our umbrella” is ambiguous.  These seem to be leased employees from your description, but again I’m not 100% sure that’s accurate (in which case they have to be covered under your plan).  However, I would have a concern regarding your arrangement if you do indeed form an affiliated service group with the clinic.  In that case the whole plan arrangement would have to be reviewed because you would have to coordinate your plan with that of the clinic, and that can be a big issue for your group.

    You would have to undo your SEP IRA and take out the assets, and as spiritrider mentioned above there is an IRS program that allows for that, but I would hire a professional to file all of the paperwork for you as it is a steep learning curve to even known what you have to do exactly to undo a SEP IRA (including how to properly distribute the assets).

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #241546 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2374
    Joined: 03/01/2018

    Further as to why to discuss with already engaged professionals that set up the 401k. The sep ira would-should come up in preparation of 401k plan review, testing, and valuation. So get them involved now.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #241549 Reply
    Kon Litovsky Kon Litovsky 
    Participant
    Status: Financial Advisor
    Posts: 920
    Joined: 01/09/2016

    Further as to why to discuss with already engaged professionals that set up the 401k. The sep ira would-should come up in preparation of 401k plan review, testing, and valuation. So get them involved now.

    Click to expand…

    Exactly.  Those who set up your plan should be able to handle all of this.  However, that’s not always the case, unfortunately. This should have been discussed during the new plan installation as it takes quite a while to set up a new plan.  This by the way is not just an issue for the individual.  This is also something that concerns the plan sponsor, meaning all of the other partners in the group are on the hook as well. The issue is that many service providers are not compliance experts, and they might just ignore this thinking it is a personal issue, but from the description this might be a plan sponsor issue as well as an individual issue.

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #241554 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8113
    Joined: 01/09/2016

    Why not just ask your custodian to correct it to a 2018 contribution and contribute for your employees, too? You have until 10/15/19.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #241562 Reply
    Liked by spiritrider
    Avatar CyberKnife19 
    Participant
    Status: Physician
    Posts: 3
    Joined: 12/03/2017

    My goodness, I am overwhelmed with thanks and gratitude for all of you who have replied!

    Yes, I will check with the TPA who did the 401k/CBP for our group to help with the paperwork of removing the contributions and the associated earnings.

    Thanks again, you all are awesome!  🙂

    #241566 Reply
    Kon Litovsky Kon Litovsky 
    Participant
    Status: Financial Advisor
    Posts: 920
    Joined: 01/09/2016

    Why not just ask your custodian to correct it to a 2018 contribution and contribute for your employees, too? You have until 10/15/19.

    Click to expand…

    That might be quite a big contribution, possibly higher than the OP’s – that’s why OP realized quickly that SEP is a very bad idea if you have employees (and it had to be set up by the practice, not by an individual, so that’s already against the rules). So this SEP really has to be undone as it was not set up properly for the practice.

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #241568 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8113
    Joined: 01/09/2016
    That might be quite a big contribution, possibly higher than the OP’s – that’s why OP realized quickly that SEP is a very bad idea if you have employees (and it had to be set up by the practice, not by an individual, so that’s already against the rules). So this SEP really has to be undone as it was not set up properly for the practice.

    Click to expand…

    Yes, I realize that, but there are actually some employers around who like to invest in their employees (reference this awesome thread). As for the practice setting it up, that could be accomplished.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #241569 Reply
    Kon Litovsky Kon Litovsky 
    Participant
    Status: Financial Advisor
    Posts: 920
    Joined: 01/09/2016
    That might be quite a big contribution, possibly higher than the OP’s – that’s why OP realized quickly that SEP is a very bad idea if you have employees (and it had to be set up by the practice, not by an individual, so that’s already against the rules). So this SEP really has to be undone as it was not set up properly for the practice. 

    Click to expand…

    Yes, I realize that, but there are actually some employers around who like to invest in their employees (reference this awesome thread). As for the practice setting it up, that could be accomplished.

    Click to expand…

    Yes, I agree, but 25% of payroll paid for by a single partner is going to be a deal-breaker.  OP won’t be able to convince partners to share cost of 25% contribution from which only one other partner benefits, this is another deal-breaker.  Group dynamics is a very complex thing to manage, so this partner would have to simply undo the SEP as the staff is now covered under a 401k + CB plan, which is rather generous in most cases vs. any other arrangement.

    But all of the above discussion is probably moot because you can not have a SEP and a 401k+CB plan in the same year anyway, at least not in the say that OP’s plan is set up (that’s how I interpret OP’s statement that the contribution into SEP was made in 2019, though it could have been made for 2018 in 2019 as well, in which case the above discussion is fine).

     

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #241573 Reply

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