Is excessSEP/IRA contribution also subject to early distribution penalty of 10%?

[Guest Taxlady1040]

Vanguard is insisting that they will code the 1099R for an excess 2012 contribution of $17,000 as both an excess contribution subject to the 6% penalty, taxable, and code 1, early distribution subject to the 10% penalty. I think this is wrong, and that it is only subject to the 6% excess contribution excise tax.

The client has amended her 2012 tax return to remove the excess SEP contribution, will pay taxes on the amended return, and paid the 6% excise tax. So she will be taxed on that $17,000 again in 2014 PLUS pay a 10% penalty?

[masteff]

See page 2 of the instructions for Form 5329. Earnings related to the excess contributions are subject to the penalty.

[Guest Taxlady1040]

Only the earnings? Even if the excess contribution of $17,00 was made in 2013 for 2012 and not withdrawn until 2014?

Another detail to note is that the $17,000 excess was an employee contribution, not the employer contribution for this sole proprietor, she discovered too late that a SEP IRA does not allow employee deferred contributions

[masteff]

The instructions on Form 5305A-SEP discuss the treatment of excess deferrals in an SEP. Basically, that since they were not w/drwn by 4/15 of the following year, they are treated as excess IRA contributions. The excess contribution is subject to the 6% excise tax. And since the earnings were not w/drwn by 4/15 of the following year, then those earnings are subject to the 10% early w/drwl penalty. http://www.irs.gov/pub/irs-pdf/f5305ase.pdf

And see page 2 of the instructions for Form 5329: http://www.irs.gov/pub/irs-pdf/i5329.pdf