ER uses comp from wrong year to calculate SEP contribution

[katieinny]

An employer realized that he has consistently been using compensation from the prior year when calculating the annual SEP contribution. For example, when he made the contribution for 2010 in early 2011, he used 2009 compensation. This has been going on for many years -- using comp from one year earlier than he should have. In mulling this over, I thought that since the contribution is discretionary from year to year, and nothing has gone out to participants stating that "you will be receiving a 6% contribution this year," the compensation that was used might not be an issue. The employer says that typically, wages have increased slightly each year, so instead of getting a 6% contribution based on 2010 compensation, the employee probably got a 5.25% contribution. Any thoughts from my peers?

[ETA Consulting LLC]

The allocation of employer contributions should, generally, be a consistent percentage of each individuals compensation for the year of allocation. Allocation on a prior year's compensation may throw the consistency off (by relatively small amounts). It may be still worth correcting.

Good Luck!

[GMK]

What comes to mind is, "How does the Plan Document define compensation?"

which likely leads to support for ETK's recommendation to correct.