Overpaid SEP Contribution

Submitted by Meryl Glovin on Mon, 2018-10-22 16:00

Taxpayer overpaid his 2017 SEP Contribution by $19,006. The plan administrator is asking me what to do.
Taxpayer wants to comply with all regulations. A mistake was made and the Taxpayer wants do the right thing and be in compliance. What are the options available to the taxpayer? Thank you.



Submitted by Alan - IRA critic on Tue, 2018-10-23 01:42

  • The extended due date for removal of the excess with earnings has now passed.  That means that the taxpayer has incurred a 10% excise tax for 2017 which must be reported on Form 5330 (see Form Inst). Of course, the SEP IRA deduction for 2017 is limited to the allowed SEP contribution amount, and an amended return will be needed if the deduction taken was higher. 
  • The excess SEP contribution is referred to as a “non deductible contribution”. You can carry over the excess to the following tax year to the extent contributions made for that tax year plus the carryover do not exceed the deduction limit for that year. This would reduce of perhaps eliminate the 10% excise tax for the following year.
  • If taxpayer wants to eliminate the excess contribution excise tax sooner, but after the due date plus extensions, they can have the excess withdrawn without earnings and report this on Form 5330.

Submitted by David Mertz on Tue, 2018-10-23 04:53

  • In what year was the $19,006 contribution made?
  • It’s the responsibility of the taxpayer to track the year *for* which a SEP contribution is made; the custodian only tracks and reports the year *in* which SEP contributions are made.  If the $19,006 contribution was made in 2018 and the taxpayer has sufficient net earnings in 2018 to support a $19,006 contribution, the taxpayer can simply treat the $19,006 as part of the taxpayer’s SEP contribution for 2018 and not part of the taxpayer’s SEP contribution for 2017.  However, if the $19,006 was contributed in 2017, it’s an excess contribution for 2017 that must be handled as Alan described.

Submitted by William Tuttle on Tue, 2018-10-23 12:54

DMx, as you pointed out. Contributions made in the following year from 1/1 until the tax filing deadline including extensions can be shifted to that year by taking the deduction for that year. Which brings up some addditional questions I’m curious about:

  1. If a deduction for such a contribution was not taken for the previous tax year. Can the following year’s tax return be amended after the tax filing date with extensions, to take it in the following year?
  2. If a deduction for such a contribution was taken for the previous tax year and was an excess contributon. Can that year’s tax return be amended after the tax filing date with extensions, to not take the deduction and take it in the following year’s tax return? What does that mean for the excise tax.
  3. If either situation can be amended do the standard SOL rules apply?
  4. If this was a one-participant 401k plan does this change any answer?
  5. Any cites?

Submitted by David Mertz on Tue, 2018-10-23 22:25

spiritrider, I think that the answers would depend on whether the facts in a particular instance would support the assertion that the election to make the contribution be for the following year was made timely and the originally filed tax return for the following year was simply erroneous, or if the facts instead suggest an attempt to circumvent the deadline for making the election to contribute for the following year.  I don’t think that the original and amended tax returns alone would necessarily be sufficient to distinguish between these two possibilities.  The IRS might default to seeing it one way or the other, but I don’t have any way to know which interpretation might be the default.

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