Common Errors in SEP IRA Plans

Friday, June 22, 2012

By Beverly DeVeny, IRA Technical Expert

Follow Me on Twitter: @BevIRAEdSlott

IRS recently completed a SEP plan compliance project and found errors by both the SEP employer and by the financial institution filing SEP contribution information. Below we outline the errors made by the employers and the financial institutions.

Errors made by employers included:

  • Exceeding contribution limits
  • Excluding eligible employees
  • Made excess contributions and/or did not properly correct excess contributions
  • Deducted too much of traditional IRA contributions
  • Did not report after-tax traditional IRA contributions on Form 8606
  • Did not follow the eligibility rules for the SEP plan
  • Deducted contributions when no contributions were made
  • Made unequal contributions for employees
  • SEP plan had no sponsor (there was no employer associated with the plan)

Errors made by financial institutions included:

  • Showing rollover contributions as SEP contributions
  • Showing transferred funds as SEP contributions

Many SEP IRA errors can be corrected using the Employee Plans Compliance Resolution Program (EPCRS). Information on this program and a SEP checklist are available on the IRS website, www.irs.gov.

It is important that the business owners utilizing a SEP plan for their business understand the rules for their plan. Reliance on an advisor may not be enough. In a worst case scenario, IRS can disqualify the plan and all assets would be considered distributed and taxable to all participants.

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