Excess SEP Contribution (SARSEP 125% rule)

[bzorc]

I currently do testing for an old SARSEP. In performing the 1.25 test, the wife of the owner has an excess contribution in the amount of $4.50. Are there diminimis amounts as it relates to this excess? I advised the client to remove the excess, with earnings, in a conservative application.

Thanks for any thoughts.

[Gary Lesser]

The employee must be notified of Excess SEP Contributions to avoid the 10 percent nondeductible contribution penalty tax. The employee sd remove excess with any gain (loss) by April 15 following year of notification (treatd as an IRA contribution on next day). If less than $100, the excess is reported in the calendar of notification (no diminimis amount -- ).

The plan document instructions should provide you with more specific information. The notification letter (if presented to trustee) will assist them in coding the corrective distribution properly.

[Guest Gordy]

looks like Rev Proc 2003-44 Section 6.10(5)© provides a de minimus amount of $100.

[Gary Lesser]

There is no diminimus amount. If less than $100, however, it is taxable in year of deferral.

The making of a nondeductible contribution (in and of itself) is not a plan defect. Have any limits (other than deductible limits) been exceeded?

[bzorc]

No other limits were violated. The custodian knows how to code this, as the participant received an $8 refund last year. Maybe next year I can get it to -0-!

[Guest Gordy]

Gary: Please clarify.

From Rev Proc 2003-44 Section 6.10(5)©. De minimis Excess amounts. If the total Excess Amount in the SEP or Simple IRA PLan, whether attributable to exective deferrals or employer contriutions, is $100 or less, the Plan Sponsor is not required to distribute the Excess Amount and the special fee discribed in section 12.05(2) will not apply.

[Gary Lesser]

This is not a VCP issue. There are no defects, just a small overcontribution; correctible under plan provisions. Thus, no diminimis amount. Read document/explanation of "Excess SEP Contributions..." (page 4 of Model Form 5305A-SEP).

Regarding the EPCRS -- The National Employee Savings and Trust Equity Act (NESTEG; S. 2424), which has broad bipartisan support, would direct the IRS to improve the EPCRS correction program for small employers. The corrections procedures currently applicable to SEP (and SIMPLE IRA) plans are, in some ways, impractical and unworkable because they assume that an employer has control over assets in the account, which is not the case. [see discussion in Appendix P--Sample Application for Compliance Under Revenue Procedure 2004-44, part B (page P-4)]