Discussion:SEP- Can employee opt out and take cash
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Discussion Forum Index --> Advanced Tax Questions --> SEP- Can employee opt out and take cash
Discussion Forum Index --> Tax Questions --> SEP- Can employee opt out and take cash
Southparkcpa (talk|edits) said: | 7 March 2008 |
| I have a client, schedule C, that funds a SEP. Her employee is now eligible for a 4K funding. The employee however wants the cash..... is there a provision where this is possible. Of course it would then be taxable to the employee but is this permitted? I have checked the threads and some research but I believe it is NOT permitted. Any help? | |
Death&Taxes (talk|edits) said: | 7 March 2008 |
| I know of nothing. | |
| 7 March 2008 | |
| If you have a SEP, you are required to fund proportionately for all eligible employees. Failure to cover an employee kills the plan, even if the employee doesn't want to participate, so you have to fund it. Employee can withdraw the funds from his account afterward, but likely they will be subject to 10% early withdrawal penalty in addition to income tax. | |
| 8 March 2008 | |
| A SIMPLE plan might be a better option, although contribution limits are lower. Employees can elect out. | |
| 8 March 2008 | |
| Not that it makes the 10% penalty hurt any less, but the employee won't have paid the 7.65% for SS & medicare (depending on income as to whether they are over the SS cap). Therefore, their net penalty is only 2.35% for a distribution taken just after being made. | |
| March 8, 2008 | |
| But Oly, in a SIMPLE, if the employee grabs the cash after it goes in, it's 25% penalty. No, Southpark, make the contribution. And I agree with Oly, switch to a SIMPLE and leave the employee hanging out there. Oh, they'll want a raise, tho'. Well, there's a conversation item for after April. | |
| March 8, 2008 | |
| Employer also saves 7.65% because they do not have to pay fica/med on the contribution. Win-win. Seems too good to be true. | |
Actionbsns (talk|edits) said: | 8 March 2008 |
| But if the employee has been around for two years and made at least $5,000, employer still has to fund for them. One of my client's is trying to get around this since someone told them it was a three year rule. I dont't see anything in my Quickfinder that says the employee can opt out. The penalty for early withdrawal is 10% of the distribution or 25% if withdrawn less than two years from the date first participated in plan. So if they left it there for awhile, then after two years have gone by, would they be able to take the cash and only be subject to 10%? | |
Southparkcpa (talk|edits) said: | 8 March 2008 |
| Thank you to all.
You have confirmed what I knew and believed the entire time that the answer is no, but sometimes we believe there is an exception. DHenry's point above is pretty good. Thanks to all. I REALLY appreciate it! Matt | |
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