Excess SEP 560 question

Submitted by Ed Y on Sat, 2017-04-01 13:13

Hi all, question about what the 560 says about excess employer contributions.

560 says excess contributions are treated as gross income in the year received and treated as contributions by the employee to his or her sep ira.
Does that mean those funds are treated as a traditional contribution? Since they are no longer employer contributions, is that deductible up to my traditional limits?

“Excess contributions are included in the em­ ployee’s income for the year and are treated as contributions by the employee to his or her SEP­IRA. For more information on employee tax treatment of excess contributions, see Pub­ lication 590­A.”

https://www.irs.gov/pub/irs-pdf/p560.pdf Page 6

Thanks!



Submitted by Alan - IRA critic on Sat, 2017-04-01 20:34

  • This is a rather confusing hybrid situation. A SEP contribution or a TIRA contribution can be made to a SEP IRA, but must be identified as to the type of contribution when made. Once made the nature of the contribution cannot be changed by recharacterization, so if it made as a SEP contribution and if that contribution exceeds the allowable deduction, it must be treated as an excess non deductible SEP contribution, not a non deductible or a deductible TIRA contribution.
  • This excess SEP contribution can be resolved in different ways. The most basic is the same method as correcting a TIRA contribution – request a return of the excess amount and allocated earnings by the due date plus extensions. If that is not done, Form 5330 must be filed reporting a 10% excise tax under Sec 4972. The 5330 is considered an employer form, but will also apply for those who are not owner-employees. The excess can be distributed (without earnings) once the first excise tax has been incurred and the 5330 will reduce the cumulative excess amount by the amount of the distribution. Like Form 5329, the 5330 will also apply the excess amount to a later year in which the allowable contribution was not made and can be deducted in that later year. But until it is either applied on Form 5330 or distributed the 10% excise tax will be incurred for each year. 

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