Employee giving wrong account number for SEP IRA

[jstorch]

Employer recently changed custodians for its SEP. In the process, several individuals chose to have their accounts at a different institution. Employer asked them to provide the account information and employer made SEP contribution to those accounts. (Contribution made approximately July 2004; calendar year plan.)

Employer has now learned that some of those accounts were an employee's existing traditional IRA, and not an IRA devoted solely to the SEP. Is this a problem for the employer? For the employee? What actions, if any, should/can employer take with respect to the contributions already made?

(Employer was switching to monthly contributions in 2005, but they are being held up for the accounts in question.)

[Bird]

Well, I'd be curious to know how the successor custodian coded the deposits. If they were coded as regular IRA contributions, or rollover IRA contributionsI guess I'd be at least a little concerned. But, at the end of the day, a SEP is just a vehicle to get money into an IRA, and if that's what happened, I'm not so sure there is a problem.

[Demosthenes]

Potential problem is that the SEP contributions can be quite a bit higher than the limits for a traditional IRA. The custodian may kick them as excess amounts.

[jevd]

Another problem is Title I protection under ERISA. If SEP contributions are co-mingled with traditional Annual IRA contributions, the employee will lose Federal protection under Title I.

[jstorch]

Thanks for the replies. In response to some of the comments:

ERISA should not be a concern because the employer is a non-federal governmental employer.

As for coding, as I understand it, the employer sent the contributions to each individual's custodian (in other words, the new "main" custodian doesn't receive funds to forward to accounts at other institutions). The coding problem would happen because the custodian did not understand that the money coming in was for a SEP IRA.

Who is at risk for improper codes here? Employee could run into IRA contribution limits, but what about the employer or custodian? Is the employer open to any liability to the employee, and does the employer need to worry about blowing its entire SEP with the IRS? Does the employer have any duty to make sure the custodian knows the money is a SEP-IRA, or can the employer simply follow the employee's instructions?

The employer's initial enrollment sheet consistently says "SEP-IRA" account information is needed, but does not contain an express warning that the employee must ensure the information is for a SEP-IRA and not some other kind of account.

[jevd]

If the contributions are being deposited to IRA accounts, the trustee/custodians should be informed that they are SEP contributions so the 5498 reporting will be correct. If not, the participants could be questioned about the contributions being in excess of annual traditional IRA limitations.

Normally the check or a cover letter from the employer indicates to the receiving trustee/custodian that the deposits are SEP IRA contributions. I don't think that the employer would have any liability but I'm not an attorney.

[mbozek]

Jevd: Where is the authority for SEP plan contributions being subject to Title I? There is one case where SEP accounts where deemed exempt from the J & S requirements. The legislative history of the SEPs indicates that SEP contributions are subject to the rules for IRAs.

[Bird]

I think any coding errors are the participants' problems. You can have a SEP with money going to different institutions, and the more I think about it the less I think the employer has to ascertain where it is going, except to assure that it is going into an IRA.

It would seem that if the contributions were improperly coded as annual IRA contributions, and the amount exceeded the annual limit, the custodian would not accept the money and the problem would be resolved right there (presumably by changing the code). Or, if the amount was less but then the participant tried to deposit a true annual contribution that would cause the limit to be exceeded, it would not be accepted and again it would be resolved at that point. If it went in as a rollover, well, it's one of those things where the code is wrong but there would be no consequence.