Custodian did not record SEP contribution as employer contribution
I am the sole shareholder of an S-Corp. In December 2018 I opened a SEP IRA account with a well known national brokerage firm. I made 2 contributions in December 2018 as follows.
A. $4,000
– Deposited paper check drawn on my corporation (made payable to me) to SEP IRA using the custodian’s android app.
– Clearly noted in the memo section of the check that this was a 2018 SEP IRA contribution with account number included.
– Back of check endorsed “For Deposit Only to my SEP IRA [account number]”.
– Deposit was accepted by custodian, and I have a copy of the cancelled check.
– Android app does not give you the option of choosing to make contributions as Employer vs. Employee.
B. $8,000
– Made contribution through the custodian’s web portal.
The total of these contributions (A+B) are well within the 25% of W-2 compensation rule.
Here’s the problem: The custodian has recorded “B” above as a “Employer Contribution” and has recorded “A” as a “Regular Contribution”
I also had planned to make a $6,500 contribution to my separate TIRA prior to April 15, but the custodian is only allowing a $2,500 contribution claiming that “A” above should be counted within the $6,500 per year (2018) TIRA contribution limit.
**Corporate and personal 2018 returns have already been filed and accepted.**
I have requested that the custodian re-classify “A” as an employer contribution because the funds came from the corporate checking account. They are pushing back trying to get me to agree to a “Return of Excess Contribution” for contribution “A”. This would require me to then make another $4,000 contribution using their web portal which would give my S-Corp. the full 2018 $12,000 deduction. My SEP IRA 2018 contribution deadline has passed (1120S filing deadline of March 15).
I do not want to file amended returns and I certainly do not want to get into a penalty situation with the IRS.
I have thought about going to another broker to open up a $6,500 TIRA, but I am concerned that my 5498s will show an excess contribution of 4k due to custodian’s classification of “A”.
Any thoughts?
Many Thanks!
Permalink Submitted by Alan - IRA critic on Mon, 2019-03-18 16:44
You appear to have the documentation, so I would continue to apply pressure to the custodian to change the first contribution to a SEP. Elevate to supervisory level ASAP. Timing is critical because they have not yet begun to process 2018 5498 forms yet. Those are issued in May, so the cutoff would probably be in late April. After that time custodians are even more reluctant to correct a 5498, so you want to get this done prior to 5498 processing. Based on this and other contribution processing miscues I hear about, it is good that you are making your TIRA contributions to a separate TIRA account. Nonetheless, they still messed this up.
Permalink Submitted by David Mertz on Mon, 2019-03-18 19:16
If the custodian has this account tagged as a SEP-IRA (reported as such on Forms 5498 from this IRA), in the absence of instructions by the depositor to treat a contribution as a regular contribution instead of as a SEP contribution, any contribution to the SEP-IRA should be tagged by the custodian as a SEP contribution by default. If the account is not is tagged as a SEP-IRA, the custodian should instead tag contributions as regular contributions by default. In fact, some custodians do not permit regular contributions to be made to SEP-IRAs and maybe there are some who do not permit SEP contributions to be made to IRAs not tagged as SEP-IRAs. In this case it seems like a bookkeeping error that they should be able to correct, given the memo notation on the check.
Permalink Submitted by Gary Tyrrell on Mon, 2019-03-18 19:23
Thanks for your responses! I have elevated this issue with management at the custodian.
Permalink Submitted by Gary Tyrrell on Wed, 2019-03-20 14:06
Have elevated to supervisory level. They are repeadtedly pushing back with these options: 1. “Return of Excess Contribution” for contribution “A”. This would require me to then make another Employer contribution of $4,000 to the SEP IRA, and would free up my ability to make a full $6,500 contribution to my TIRA. 2. Make a $2,500 contribution to my TIRA and then make another Employer contribution of $4,000 to the SEP IRA Returns have been filed and March 15 S-Corp. filing deadline has passed. I sense from my conversations with the custodian that they have encountered this problem before, and are trying to make changes to prevent it from happening in the future. They clearly are placing the burden of fixing this on the client. If they are this difficult now, I can only imagine what a “Please correct my Form 5498” situation might look like.