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Overcontribution to SEP


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What happens is an employer makes a mistake and contributes too much to one employee's SEP account? Is it a deemed IRA contribution? Who is eligible for the deduction, if any? The SEP provider returned the money to the employer and issued a 1099-R to the employee. I can't believe that this can be correct. Any help is appreciated.

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Guest Paul McDonald

I believe the mistaken contribution should be treated as income to the employee. The employee, in turn, could consider an amount (up to $2,000) their personal IRA contribution subject to adjusted gross income limits for deductability and any amount over $2,000 would be an excess IRA contribution subject to the 6% excise tax. According to the IRS publication 590, you may also withdraw the amount tax free if withdrawn by the due date of your tax return as long as you didn't take a deduction and you also withdraw the interest or other income earned on the contribution.

The SEP provider should not have sent the money to the employer as the employer is not the owner of the IRA. The employee would have to square things away with his employer regarding the overpayment. The 1099 would go to the IRA owner and I do not know what code they would use to require that the employee include certain amounts in income. The erroneous contribution would be income in the year of deposit and the interest would be income in the year of withdrawal (I believe).

Any other thoughts?

[This message has been edited by Paul McDonald (edited 01-27-99).]

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  • 3 weeks later...

Can't believe that the assets were returned to the employer. In some settings that could be viewed as a prohibited transaction. The employer should merely have included the amount on the employee's W-2. In any case, the trustee or custodian should use Code P (Code Code 8 if distributed during the plan year that the excess occurred) in box 7. For example, assume an excess of a $300 contribution and the return of $30 of gain (gain is required to be distribute if excess corrected before the due date of the individual's return). $300 is entered in box 1, $30 entered in box 2a, and the code (8 or P) is entered in box 7 of Form 1099-R. The correction method used was not valid and should be reversed upon the advice of the client's tax/ERISA counsel. The money belongs to the IRA holder!

[This message has been edited by Gary Steven Lesser (edited 02-14-99).]

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