Correction for SEP

[Guest peanut2]

An employer establishes a SEP for its employees on an IRS model document and provides that one of the eligilibity requirement is service in any 3 of the preceding 5 years. However, in practice, the employer has unintentionally done the following:

(1) For some eligible employees, the employer has either not started any contributions or started contributions later than the third anniversary of the hire date.

(2) For some ineligible employees, the employer has started contributions prior to the third anniversary of the hire date.

(3) For certain employees, the employer has contributed more than the monthly contribution specified in the plan document.

What are the methods for correcting these failures which have been on-going for years? What are the penalties, if any?

Thanks in advance.

[mbozek]

Before you can correct the mistakes you have to answer the question of whether excess contributions can be removed from the employees iras. IRA contributions are 100% vested and the custodian may not permit the er to remove the contributions because of the risk of a lawsuit from the participants. There maybe nothing that can be done for persons in (2) and (3).

As to the failure to make contributions the only recourse is to make up the missing contributions to the participants. Also how far back is the failure to make contributions? If the violation is more than 3 years old the s/l to disqualfiy employer contributions will have expired ( 6 yrs if the contributon is more than 25% og gross income for the er). There is a question of whether the employees could sue the employer for the missing contributions.

There is also the question of whether an employer can retroactively correct mistakes to a SEP plan after the time for making contributions has expired to avoid the loss of the tax deduction ( and the inclusion of the contributions in the employees income since the plan does not qualifiy as a SEP).