SEP-IRA Overfunded in Past Years
The employer in previous years overfunded the SEP-IRA. Is there a way to correct this problem? He would like to leave the money in the plan, if possible.
The employer in previous years overfunded the SEP-IRA. Is there a way to correct this problem? He would like to leave the money in the plan, if possible.
Permalink Submitted by Denise Appleby on Sun, 2008-01-27 14:17
Whose account under the SEP was overfunded? The employer’s , his employees’, or both?
Also, is the business unincorporated or incorporated?
Permalink Submitted by Bart DeLeve on Sun, 2008-01-27 18:53
The employer is a regular C Corporation. Employer and Employee accounts have been overfunded.
Permalink Submitted by Denise Appleby on Sun, 2008-01-27 21:08
Thanks. I asked because IRS publications indicate that there may be some variation in treatment for incorporated vs unincorporated entities, for the business owner.
[b]Response[/b]:
Another question I should have asked is what a type of excess. However, I will assume that it is a [url=http://www.retirementdictionary.com/Excess-nondeductible-employer-contri… excess contribution[/url] ( i.e. contributions that exceeded 25% of the employee’s compensation). If that’s not the case, please post with the type of excess contribution.
[b]Correction…[/b]
The employer must provide a notification to each affected employee, making them aware of the excess contribution.
The employer must treat those excess amounts as W-2 wages. Therefore, the affected employees ( including the business onwer’s) W-2s will need to be amended for the years that excess contributions were made to their SEP IRAs, and they may need to file amended tax returns to reflect the new wage amounts.
The aforementioned notification should include an explanation that the employee’s W-2 will be amended.
Upon receiving the notification from their employer, the employees should notify their IRA custodian of the excess SEP contribution, and instruct the custodian to treat the amounts as IRA contributions. The employees would need to:
Amend their tax returns to reflect the amounts as IRA contributions
Remove any amounts that result in excess IRA contributions.
If these excess SEP contributions result in excess IRA contributions, and the excess amounts are not corrected by the deadline, the affected IRA owners will owe the IRS a 6% [url=http://www.retirementdictionary.com/excise-tax.htm%5Dexcise tax[/url]for each year the excess remains in the IRA. However, since this would be due to erroneous information (or lack of timely receipt of information) from the employer, the employees would have a good case for requesting a waiver of these penalties.