fixing missed contribution

[wsp]

A client did not make a contribution to the SEP IRA of a participant for a few years, based upon erroneous information provided to them. We are now trying to rectify that and make a lump sum contribution (including appropriate income) before the IRS catches up to them and makes self correction not an option. However, the IRA Operations Department at the brokerage firm where the assets are held will not accept or allocate (ie label) contributions for prior years saying they are prohibited from doing so. Can anyone provide me some insight on why they would say this? Not doing so would disqualify the plan so something has to give on this one...

Unfortunately it's not so simple as having them deposit and label as a current year's contribution as the amount is well over $100,000. Yes, it was an HCE that was missed...

Any advice would be appreciated

[mbozek]

Contributions to a SEP type plan can only be made on an annual basis and the maximum contribution cannot exceed 40k in 2003. For tax law purposes it is too late to go back and make contributions for the prior years. Also the brokerage account's data entry system cannot be programed to allocate the contribution to prior years or allow a contribution greater than 40k in 2003.

[Appleby]

Further, the IRA Custodian is required to report SEP contributions in the year they are received, regardless of the year they apply to (IRS Instructions for filing form 5498).

mbozek...Isn’t the correction be available under the VCSEP program- namely the Exclusion of eligible employees from employer contributions . Also, the IRA Custodian should be able to accept in excess of the $40,000 for the year. Remember, even without the correction, they should be able to accept $80,000 for 2003, given that contributions for 2002 and 2003 can be made in 2003, and contributions must be reported in the year made.

The contributions must be adjusted for earnings. Tell the Custodian the reason for the contribution, better yet- write them a letter of explanation; include a reminder that the administration of the SEP is the employer’s responsibility, not the Custodian’s and that should they stand in the way of correcting any plan defects…etc.etc.

[Gary Lesser]

It would appear that self-correction (if it applied) may have to be made over a two year period to satisfy the trustee/custodian. The letter should state that the contributions are being made pursuant to Rev Proc 2003-44 etc. But see below.

Considering the amount invloved, however, "Self-Correction" (Section 8.01) may not be available as the error may be more than "insignificant." SCP has no reliance and the amount of penalties could be significant (cummulative 6 percent penalties for employees and 10 percent for the employer).

Gut feeling , I'd ask for service approval (VCP). As long as we have "user fees," don't expect answers (just problems) from the IRS.