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Excess Contributions to a SARSEP


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My employer advised me Friday (5/19/15) that excess contributions were made to my Vanguard SEP-IRA through the company's SARSEP plan for the years 2012, 2013 and 2014, and that I will have to amend my tax returns for those years. The excess contributions are on the order of $7500, $8333, $8333 for those years. My total income deferrals in each year were more than 25% of my pay. I was over 59-1/2 years of age when the contributions were made and was planning to retire at age 65 at the end of this year. Contributions are deducted from my pay and sent to Vanguard by the company's CPA. I have not been provided with corrected W2s or with written Notices of Excess Contribution. I have never been provided with a copy of the Form 5305A or other SARSEP plan document. The employer's SARSEP is being audited by the IRS, and I am fearful that the plan may be disqualified. What do I do?

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  • 6 months later...

Welcome to BL. Since no one replied, I'll take a stab!

Since employer is being examined, I would just wait. The employer will probable be hit hard and stiff sanctions imposed upon audit. Some of the excesses may have been caused by the employer making nonelective contributions. To that extent, the excess may is to be returned to the employer (in this case you get 1099 showing $0 taxable).

Technically, the amount above the 25% (of taxable compensation) would have been included on Form W-2 (box 1) and corrected as an excess in earlier years. If not timely corrected, the excess would be subject to a 6% cumulative excise tax until corrected--although it may be abated for good cause; like you didn't know of excess. Under the EPCRS, if the amount is returned to you (adjusted for earnings), it may will be reported as taxable in year received (better than amending prior returns). If the excess amounts were included in income in earlier years, you would have a good argument (but may have to convince service that amount, other than gain, was already taxed).

If the IRS allows the excess to remain (possible, but unlikely, since it is a violation of code section 415), you will be home free.

The alternative (self-fixing), would be to remove the excess after the return due date (without adjustment for earnings). The amount, other than earnings, isn't taxable (provided the amounts were previously included in income).

Colpash, has this been resolved? If so, what happened?

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Gary, thanks much for your response. Your advice is consistent with what my tax attorney told me (and cost considerably less!) The audit of my employer is still pending. I and several other HCE's received a request from the IRS to extend the statute of limitations for 2012, and, on the advice of counsel, I complied with that request. I will let you know how this plays out. In the meantime, happy new year and thanks again!

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