SEP excess contribution
Taxpayer is self-employed and has no employees. Tax preparer incorrectly calculated the SEP plan contributions on 2017 and 2018 returns resulting on excess contribution of approximately $17,000 for each year. Taxpayer discovered the error in 2020. We are now filing amended returns to correct this and multiple other errors.
Can taxpayer use SCP to remove excess plus earnings or does he need to use VCP? Is he subject to 6% and 10% excise taxes until the excess plus earning are withdrawn?
Permalink Submitted by Alan - IRA critic on Tue, 2020-12-01 16:36
Taxpayer can use SCP, file Form 5330 (Sec 4972 violation) for 2017 and 2018, and request a distribution of the excess total (earnings remain in the SEP). Form 5330 allows an excess to be applied for 2019 or 2020 if there is space to absorb that excess. This can reduce the amount subject to the 10% excise tax. The 10% rate applies, the 6% rate does not. Therefore, a 5330 must be filed for 2017 (10% on 17k), 2018 (10% on 34k), 2019 (10% on 34k less any excess absorbed in 2019, and 2020 (no excess remaining if the 34k has either been absorbed or distributed. Note that the corrective distribution should be explained to the SEP custodian, since taxable Box 2a should be 0 because the taxes will already have been paid by amending the 2017 and 2018 returns showing only the allowable SEP contribution for those years.