SEP-IRA Question, need small business owners help

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countrymouse
Posts: 14
Joined: Tue Nov 17, 2015 6:40 pm

SEP-IRA Question, need small business owners help

Postby countrymouse » Wed Jan 11, 2017 2:52 pm

I am a business owner with an S-Corp. My SEP is confusing me. It all starts with an Edward Jones SEP Account. We went down that path for about 2+ years, and then became Bogelheads. Decided to move everything to Vanguard. The EJ rep did not know much about SEP accounts. I think they were/are incorrect. I am attempting to fix it now.

My husband and I are both W-2 employees of the business. There are other employees but they do not qualify for the SEP yet (<3 yrs service).

EJ created a SEP Employer Account under my husband. There was a contribution Year 1 & Year 2 into that account under my husbands name ($35,000). I believe the contribution went to the Employer/Employee (this is where confusion comes in, see below). No contributions yet for 2016 as we made the decision to go with Vanguard. We put $15K in under me, and then immediately decided to move to Vanguard, and it's cash moving over.

So I opened up a SEP-IRA Vanguard account myself. Didn't know this at the time, but it was an EMPLOYER account. I have contributed $50,000 to my Employer account, $0 to either employee for 2016. So now my accounts are all wonky.

Time period trying to even out: Tax years 2014, 2015, 2016
Employer Account: $50,000
Employee Account 1: $33,000 (when my husband rolled his to Vanguard I believe it's rolling as a SEP-IRA Employee Account)
Employee Account 2: $15,000

(My goal is to get this amount evened out across Employer/Employee/Employee accounts with my 2016 contribution(s)).

Few questions:
-- Does the Employer have to contribute equal % amount to an Employer SEP as it does to the Employee Accounts each year? If Employer puts $10K in their SEP, each qualifying Employee gets $10K too? Or does the Employer even have to hold an account? Do they just contribute to an Employee SEP-IRA?

-- I also read that the amounts to not have to match if the Employees are Spouses. I read this on one article and have not found other supporting information on this yet. Just wondered more than anything.

-- One last question and I'm going to ask my accountant this one too. We pay ourselves a salary, $100K and $85K respectfully. So the contributions are a % of our income. But that is just our W-2, our actual taxes will reflect a lot more under the S-Corp (like $425K+). Do you all think the percentage of income is based off the W-2 salary or total income on taxes?

Thanks very much. I know this is uncharted territory for many of you, but for those of you business owners that know this info, it's helpful. I've read SO much about it but still feel slightly confused and you were the first place I wanted to turn for help, since you're all the smartest folks I know.

Spirit Rider
Posts: 5629
Joined: Fri Mar 02, 2007 2:39 pm

Re: SEP-IRA Question, need small business owners help

Postby Spirit Rider » Wed Jan 11, 2017 3:14 pm

You are under a lot of misconceptions:
  • There is an employer SEP IRA plan, but there are no SEP IRA employer accounts, only employee accounts.
  • Unless you have an SAR SEP, there are no employee contributions, only employer contributions to employee accounts. You almost certainly do not have a SAR SEP, because it could not have been opened after 12/31/1996.
  • For an S-Corp, employer contributions are limited to 25% of each employee's W-2 Box 1 wages. All other income is irrelevant.
  • If most of that other income is S-Corp distributions, your salary looks suspiciously and unreasonably low (big IRS red flag).
  • Generally, each employee (including a spouse) must received the exact same contribution %.
  • Each eligible employee has there own specific individual SEP IRA account and all employer contributions for that employee must go into that account.
Actually, this is not uncharted territory. Many Bogleheads are sole proprietors, partners or S-Corp owners. Many have had or still have SEP IRAs, SIMPLE IRAs and/or one-participant 401k plans.

Calling Alan on how to determine the correction steps necessary. Who by the way is the resident sage of all things involving retirement plans. Especially, how to correct problems after the fact.

Pdxnative
Posts: 209
Joined: Sat Nov 07, 2015 2:17 pm

Re: SEP-IRA Question, need small business owners help

Postby Pdxnative » Wed Jan 11, 2017 3:44 pm

A few things to add to spirit rider's excellent summary:

1. You should read up on SEPs, starting with the IRS page here: https://www.irs.gov/retirement-plans/pl ... n-plan-sep

2. If your accountant has been involved in the transactions you've described, I'd have big concerns about the quality of advice you're getting there. SEPs should be appearing on your corporate return, so I'm not sure how you could be doing all this (or at least taking the proper deductions) without your accountant knowing. Make sure s/he understands SEPs and is explaining them properly to you.

countrymouse
Posts: 14
Joined: Tue Nov 17, 2015 6:40 pm

Re: SEP-IRA Question, need small business owners help

Postby countrymouse » Wed Jan 11, 2017 3:50 pm

Thanks Spirit Rider, appreciate the nice reply.

I mispoke. I understand it's all Employer contributions INTO the accounts, but does the Employer just make contributions to Employees period? And that is the end? So that is how I originally understood it. But then looking at HOW the accounts are created in Vanguard or EJ, made me question it.

For example, in Vanguard I created my SEP account. It has no account #. My husband who has a SEP-IRA in there now, has an account number. My looks like an "Employer" account. Is that a foolish statement? So if Employer A contributes to two employees, they contribute the same % to each employee, period. No other money going into "Employer" account, correct? That is the main question and may be a silly one.

To your other comments:
It's not a SAR SEP. Hadn't heard of that one!
Thanks on the W-2 Comment, that answers my question perfectly.
Our salaries should be right at the 50% mark, I quoted that total profit wrong.
What I am trying to even out is the % part too. I know it was done incorrectly (wtf EJ, even I realize that now, but how did they miss advising us on that, he knew we were both Employees). I believe if I even out my contributions this year to be accurate for all previous/current years, I can maybe try to avoid any penalties if audited.







Spirit Rider wrote:You are under a lot of misconceptions:
  • There is an employer SEP IRA plan, but there are no SEP IRA employer accounts, only employee accounts.
  • Unless you have an SAR SEP, there are no employee contributions, only employer contributions to employee accounts. You almost certainly do not have a SAR SEP, because it could not have been opened after 12/31/1996.
  • For an S-Corp, employer contributions are limited to 25% of each employee's W-2 Box 1 wages. All other income is irrelevant.
  • If most of that other income is S-Corp distributions, your salary looks suspiciously and unreasonably low (big IRS red flag).
  • Generally, each employee (including a spouse) must received the exact same contribution %.
  • Each eligible employee has there own specific individual SEP IRA account and all employer contributions for that employee must go into that account.
Actually, this is not uncharted territory. Many Bogleheads are sole proprietors, partners or S-Corp owners. Many have had or still have SEP IRAs, SIMPLE IRAs and/or one-participant 401k plans.

Calling Alan on how to determine the correction steps necessary. Who by the way is the resident sage of all things involving retirement plans. Especially, how to correct problems after the fact.

countrymouse
Posts: 14
Joined: Tue Nov 17, 2015 6:40 pm

Re: SEP-IRA Question, need small business owners help

Postby countrymouse » Wed Jan 11, 2017 3:53 pm

Thank you too Pdxnative.

My accountant was not that involved. My bookkeeping records had SEP Distribution and $$, but not sure it was designated PER employee. Perhaps it should be.... I will ask him. Good thing to consider.



Pdxnative wrote:A few things to add to spirit rider's excellent summary:

1. You should read up on SEPs, starting with the IRS page here: https://www.irs.gov/retirement-plans/pl ... n-plan-sep

2. If your accountant has been involved in the transactions you've described, I'd have big concerns about the quality of advice you're getting there. SEPs should be appearing on your corporate return, so I'm not sure how you could be doing all this (or at least taking the proper deductions) without your accountant knowing. Make sure s/he understands SEPs and is explaining them properly to you.

Spirit Rider
Posts: 5629
Joined: Fri Mar 02, 2007 2:39 pm

Re: SEP-IRA Question, need small business owners help

Postby Spirit Rider » Wed Jan 11, 2017 4:31 pm

The employer (S-Corp) creates the SEP IRA plan, by completing the appropriate paperwork. This only creates the plan. Then referencing the plan each individual's SEP IRA account is opened.

The only thing I could see if what you are referring to as an employer account is really a summary of the "plan". This would then be the total of all plan assets of all plan employee accounts.

Employer retirement plans are controlled by significant IRS regulations. The are very detailed rules for correcting errors and mistakes can be a real problem.

I am not qualified to answer your specific circumstances. I think people get lulled into complacency, because of how easy SEP IRAs are to set up. When you involve employer contributions to W-2 employees this not your father's IRA.

Pdxnative
Posts: 209
Joined: Sat Nov 07, 2015 2:17 pm

Re: SEP-IRA Question, need small business owners help

Postby Pdxnative » Wed Jan 11, 2017 8:08 pm

Countrymouse, I think a call to Vanguard would help you. Everything spirit rider said is correct. I think part of what is confusing you is the way your plan is set up with them. I haven't been directly involved with this for a few years but iirc, you (or rather, the s Corp) do set up an employer account with vanguard to establish the plan with them, and the individual employee sep-iras are visible from that account. But that employer 'account' is not a sep-IRA holding sep-IRA funds. It is simply to define the plan and facilitate employer deposits into the actual employEE sep-IRA accounts. The sep-IRA accounts are the individual employee accounts (which may also be visible from the s-Corp account login) and these are 100% owned by the employees. The employees may also have their own logins to their individual accounts.

I may be remembering this somewhat incorrectly but I think a call with vanguard would clarify.

buldogge
Posts: 50
Joined: Fri Oct 07, 2016 10:06 am

Re: SEP-IRA Question, need small business owners help

Postby buldogge » Wed Jan 11, 2017 8:34 pm

Most major points have been touched on already...

-You, acting as the S-Corp, created an employER account and provided employEE information to open individual accounts to receive the employER contributions.

-Each year the S-Corp/employER contributes up to 25% of the employEE's W-2 salary.

-Each eligible employEE must receive the same/equal contributions from the employER.

-Thru the employER portal (or by mail), contributions will be made into the employEE accounts.

-Mark

countrymouse
Posts: 14
Joined: Tue Nov 17, 2015 6:40 pm

Re: SEP-IRA Question, need small business owners help

Postby countrymouse » Thu Jan 12, 2017 9:15 am

Thanks everyone, appreciate the great, helpful comments.

It's as I thought it was initially. It was the layout on VG and in EJ that planted this seed making me question myself. I will still call VG to find out why the format looks so different from my husbands SEP-IRA. I have called many times in the past few weeks for various questions, their Customer Service is A+.

I have read about Contribution 'fixes' if you have over-contributed, but not if you have under contributed. Which likely means I just have to take from those I've given (husband) and distribute to me (employee 2). I cannot add this year to balance previous years and "even out" (to my knowledge). I was hoping I could add more this year to mine, to balance out husbands for years that were mistakes. I am guessing that is a big no-no. WTF Edward Jones! This is what happens when you don't learn how to do something yourself and trust others.

https://www.irs.gov/retirement-plans/se ... gal-limits

Again thank you all... I knew I could count on you to not shame me and answer intelligently.

countrymouse
Posts: 14
Joined: Tue Nov 17, 2015 6:40 pm

Re: SEP-IRA Question, need small business owners help

Postby countrymouse » Thu Jan 12, 2017 9:35 am

Actually I found a more detailed Fix-It Plan online that touches on all issues. Thanks!

https://www.irs.gov/retirement-plans/se ... -solutions

niceguy7376
Posts: 1748
Joined: Wed Jul 10, 2013 2:59 pm
Location: Metro ATL

Re: SEP-IRA Question, need small business owners help

Postby niceguy7376 » Fri Jan 13, 2017 12:04 am

buldogge wrote:-Each eligible employEE must receive the same/equal contributions from the employER.


Is it the same contribution in $ amount? I think it should be % that needs to be same and that this % is then applied to each of the employee salary.

buldogge
Posts: 50
Joined: Fri Oct 07, 2016 10:06 am

Re: SEP-IRA Question, need small business owners help

Postby buldogge » Fri Jan 13, 2017 12:08 am

Yes...sorry for any confusion...same/equal, in terms of % of W-2...up to 25%.

-Mark

niceguy7376 wrote:
buldogge wrote:-Each eligible employEE must receive the same/equal contributions from the employER.


Is it the same contribution in $ amount? I think it should be % that needs to be same and that this % is then applied to each of the employee salary.

Spirit Rider
Posts: 5629
Joined: Fri Mar 02, 2007 2:39 pm

Re: SEP-IRA Question, need small business owners help

Postby Spirit Rider » Fri Jan 13, 2017 2:05 am

buldogge wrote:Yes...sorry for any confusion...same/equal, in terms of % of W-2...up to 25%.
niceguy7376 wrote:
buldogge wrote:-Each eligible employEE must receive the same/equal contributions from the employER.

Is it the same contribution in $ amount? I think it should be % that needs to be same and that this % is then applied to each of the employee salary.

While mostly every SEP IRA provider uses a 5305-SEP, which requires the same percentage contribution, but an individually designed or prototype plan may use a uniform dollar amount. The anti-discrimination rules don't allow an employer to favor the higher wage earner, but a uniform dollar amount favors the lower wage earner so that is OK.

I doubt many employers these days would adopt a uniform dollar plan. However, I did work for a really great boss in the 80's who had a profit sharing plan that allocated 25% of the profits by uniform dollar and 25% by uniform percentage. He felt that everybody deserved a basic amount for helping the company be successful, but that higher wage earners also deserved a somewhat bigger amount based on their salary.

I think that company had the highest morale of any company I ever worked for. That uniform dollar was sometimes 20% of the production workers pay and then everyone got some single digit percentage on top of that. Of course that taught us the disadvantage of a true profit sharing plan We had a bad year and some of the production workers had baked that money into their life style. It really hurt them when it went away. So much that the boss gave everyone a small bonus even though the company lost money that year.

I doubt there are many true profit sharing plans anymore.


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