Correction of SEP Under VCP

[Danny CPA]

I am working with a client (a non-profit client) on correcting issues in their SEP, and we have found the following issues:

- Underpayments to employee in 1997-1999, totaling $20,000, so plus interest on the VFCP calculator the total they owe is $35,000. I know that we need to contribute that and how to handle this portion under the IRS' VCP.

- Overpayments totaling $9,000 to current employees (ranging from 2004-2009). The way I understand Rev. Proc. 2008-50 is that we remove these excesses from the plan plus earnings. Do we need to file amended returns for these previous years to remove the deduction, or since this is a non-profit do we just let those pass and not deduct future contributions until they reach the $9,000 they get back?

- Overpayments to FORMER employees of $24,000 before earnings (ranging from 2004-2009). This is where I am scratching my head. There is no possible way we will recover the money from former employees, so is this amount, plus the earnings subject to the 10% penalty since it is staying in the plan? What collection efforts do we need to undertake to get the money from the former employees?

As I said, they have some major issues, and since they are so old, I don't believe we can self correct under SCP (even though that is what a representative at the DOL told our client).

Any insight or instruction would be appreciated, as I can't find guidance on how to handle excess contributions to terminated employees.

Thank you,

Daniel