Amended return and SEP contribution

Submitted by Tim O'Neill on Mon, 2020-06-08 11:36

A client contributed the maximum amount he could to a SEP in 2018 based upon his Schedule C self-employment earnings. We now need to amend his Schedule C and reduce his income. The reduction creates and excess SEP contribution for 2018. The SEP contribution was made in 2019 and the client did not have any self-employment income in 2019. How do we correct the SEP over funding? Is he liable for a penalty?



Submitted by William Tuttle on Mon, 2020-06-08 17:35

SEP IRA excess contributions are a bit messy to clean up if not returned along with earnings or those made following the tax year are reallocated to that tax year by the tax filing deadline including extensions. Keep in mind a self-employed individual is both employer and employee. 

  • This was a SEP IRA plan error and must be corrected with the IRS Employee Plan Compliance Resolution System (EPCRS). This should be correctable under the Self-Correction Program (SCP) without fees.
  • To the degree the client will have not have sufficient net earnings from self-employment in 2020 to offset the excess contribution balance. Remove the net excess contribution balance, but no earnings. Note: There is usually a checkbox on the SEP IRA custodian’s form whether this is a return by the tax filing date including extensions or a return of non-deductible contributions after that date.
  • File a 2018 Form 5330 to report the 2018 excess contribution on Schedule A as a non-deductible contribution and report the 10% excise tax on Parts 1&2. Pay the excise tax due.
  • File a 2019 Form 5330 to report any prior year non-deductible contributions on Schedule A and report the 10% excise tax on Parts 1&2. Pay the excise tax due.
  • File a 2020 Form 5330 to report any prior year non-deductible contributions on Schedule A and report any amount allowable as a deduction or amount of any prior year nondeductible contributions returned to you in this tax year for any prior tax year. If the resulting non-deductible contribution balance is $0, there will be no further need to file Form 5330 for this problem and no excise tax due. 
  • Form 5330 is sent to a different address and are not part of personal tax returns. The 2018 and 2019 forms should be sent this year by 7/31/2020* and the 2020 form next year by 7/31/2021. I would place them in the same envelope. *I do not know if the 5330 deadline have been extended.
  • File an 2018 amended personal return, with reduced Schedule C business profit, reduced SEP IRA deduction and any difference in tax liability.
  • Employee
    • The excess contributions must also be reported on a 2018, 2019 and 2020 Form 5329 in a similar manner and a 6% excise tax due for 2018 and 2019. The 2018 and 2019 Form 5329s can be placed in the same envelope and mailed to the same place you would mail your return. File the 2020 Form 5329 with your 2020 Form 1040 return.

    Submitted by Jessica DeBold on Tue, 2024-02-13 23:46

    Hello!  I am doing some research for a similar situation.  Mine involves a self-employed person and the Schedule C for multiple years are being amended and the SEP contributions will be considered excess.  Do I understand your instructions above that he will have to file the 5330 for each year as the employer, subject to the 10% excise tax and the 5329 for each year as the employee subject to the 6% excise tax?  Any sources that you can point me to explaining this for a self employed individual?  Thanks!

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