Excess contribution to SEP and RMD calculation

[cathyw]

Another question related to an earlier post -- the employer made an excess contribution to an employee's SEP-IRA in December 2024.  Per EPCRS, the financial institution returned the excess funds plus earnings to the employer in January 2025.  This employee is due an RMD for 2025.  For purposes of the RMD calculation, do you deem his SEP account balance to be exclusive of the erroneous allocation that was subsequently withdrawn (which I would do if this was a profit sharing account that received an incorrect deposit from the employer) or do you treat it strictly as a cash basis IRA balance as of 12/31/24?  To me it's logical to adjust the balance to reflect the correct accrued benefit, but I haven't found any supporting guidance for this position.

Thanks. 

  

[Peter Gulia]

For a SEP-IRA, the receiving account is an Individual Retirement Account or Annuity.

Unlike a § 401(a) plan for which a plan’s administrator sometimes might check whether a distribution is enough to meet the plan’s minimum-distribution provision, an IRA trust, custodial account, or annuity contract often provides that the IRA owner decides her distribution, if any. Often, the employer that maintains the SEP is not responsible. Often, an IRA’s custodian or annuity insurer is not responsible.

Often, none of an IRA owner’s IRAs provides an involuntary distribution. Rather, an IRA owner decides how to meet the minimum that applies regarding the aggregate of her IRAs.

To determine a valuation-year account balance, a § 401(a) plan’s administrator might consider 26 C.F.R. § 1.401(a)(9)-5(b) https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)(9)-5#p-1.401(a)(9)-5(b), which permits some adjustments, to the extent the plan so provides.

But for IRAs, a rule provides this: “For purposes of determining the required minimum distribution from an IRA for any calendar year, the account balance of the IRA as of December 31 of the calendar year preceding the calendar year for which distributions are required to be made is substituted for the account balance of the employee under § 1.401(a)(9)-5(b). Except as provided in paragraph (d) of this section, no adjustments are made for contributions or distributions after that date.” 26 C.F.R. § 1.408-8(b)(2) https://www.ecfr.gov/current/title-26/part-1/section-1.408-8#p-1.408-8(b)(2).

The referred-to paragraph (d) allows some adjustments regarding rollovers and transfers, but does not particularly mention a corrective distribution of the kind described above. 26 C.F.R. § 1.408-8(d) https://www.ecfr.gov/current/title-26/part-1/section-1.408-8#p-1.408-8(b)(2).

This is not advice to anyone.
 

[cathyw]

Thanks for the comprehensive response.  I discussed with the client and since the additional RMD will be small we agreed to calculate on the actual account balance as of 12/31/24.  

[Bri]

Devil's advocate - What if the error had been a million dollars?  (Wrong omnibus account number on the transmittal to the custodian or something)