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Mistaken Contribution to SEP


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We have a client that sponsors a small 401(k) plan.

Back in early 2010 they mistakenly deposited 401(k) profit sharing contributions to SEP accounts. They had not contributed to the SEP since 2006. They started the 401(k) plan in 2008.

I would think they should be able to write the mutual fund company a letter indicating that these were mistaken deposits and to please transfer these amounts to the 401(k) plan. It turns out that they have the same fund company for the 401(k) plan.

Does anyone agree/disagree?

Thanks

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You may have some other nuances to contend with (i.e. employee does not consent, Form 5498 issued reflecting the contribution). Depending on who received the contribution (i.e. if all employees receive the contribution), then realizing there is nothing to preclude the employer from having a SEP and a qualified plan within the same year may help. The only provision is that the SeP should be written to a SEP adoption agreement (as opposed to the IRS Form).

Some flexibility here depending on the fact pattern.

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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I agree, it should be fixable. But be prepared for the investment co. to want to treat the money going out as distributions, with 1099-Rs being issued; you'll have to talk to them beforehand and get detailed instructions on how to fix it without 1099-Rs - maybe a letter of instruction with signature guarantee, and language about indemnification. Been there...

Ed Snyder

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Was the money invested in the SEP per participant in the same investmests as would have occured had the money been correctly deposited in the 401K) plan? If not, you may need to consider issues with potential in lost earnings.

I agree that something like this should be correctable, but extreme care needs to be taken to be sure all plan participants are made whole. Files should be properly documented to account for the mistake and how it was corrected as well as how procedures have been tightened so as to not allow this type of thing to happen again in the future.

IMO, some time should be spent looking at the IRS EPCRS correction program for some guidance.

http://www.irs.gov/retirement/article/0,,id=96907,00.html

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