Employer contributes too much to employee’s SEP account
Through administrative error Employer contributes 10% of Employee’s compensation to SEP IRA instead of intended 5% and Employee has now terminated employment.
I’m assuming Employer can ask the former Employee to withdraw and return the excess but if the employee refuses does the Employer have much recourse?
Does this create an “excess contribution” that would trigger the 6% annual excise tax on the Employee?
Permalink Submitted by Alan - IRA critic on Thu, 2016-02-25 18:15
The SEP IRA fix it guides that the IRS provides do not address several common plan failures and this is one of them. An insufficient contribution can be made up, and the contribution rate for all the other employees can be increased to match the rate paid to the terminated employee, but I doubt the Employer wants to consider that. Perhaps if employee returns half the contribution with allocated earnings, and the W-2 revised accordingly it would be acceptable, but that is just a guess. The additional 5% is not an excess contribution per se, as those are limited to exceeding the 54,000 max or 25% of the employee’s compensation, which did not occur here. Employer may need to call the IRS on this one. https://www.irs.gov/Retirement-Plans/Employee-Plans-Customer-Account-Services