Contribution mistakenly deposited to SEP account

[Dougsbpc]

We administer a 401(k) plan where the employer mistakenly funded an employer contribution to one of the participants old SEP account.

I would think the proper thing to do is have the trustee send a letter to the IRA custodian indicating the mistaken deposit. Then we should determine earnings/losses on the deposit and have them either make a payment out of the SEP account for $xxx to the trustee or to the plan directly.

The IRA custodian is claiming the only way they can do this is by claiming the deposit is a taxable distribution.

Does anyone have experience with this?

Thanks.

[Bird]

I've had that happen a couple of times. I know that IRA custodians are difficult to deal with when it comes to incorrect deposits, and yes, anything that goes out of the account, they want to treat as a distribution. I can think of one time where it was fixed properly, just as if the money never went in, and another where we let them treat it as a rollover since it went to a particular participant's account and at the end of the day was a wash (clearly not correct but it just wasn't worth trying to get it done right).

So...if the contribution was for just a single participant, and you can "roll" it into that participant's 401(k) account, you can consider going the (wrong) "rollover" route. Otherwise, you'll just have to bang your head against the wall until the IRA custodian "gets it" and returns the money. You might want to have the sponsor write a letter right away saying how it was just a mistake and that they are formally requesting that it be returned and that if it isn't, they expect the custodian to bear all costs for losses and anything else you can think of - just a lot of bluster to at least make them start to think about it. Then pester and harass them until they finally take it to the oracles in the legal department, who will probably agree to return it as long as the sponsor signs a letter of indemnification or some other officious-sounding parchment that they can ooh and aah over and think that they accomplished something for that particular month instead of just getting in other people's way.