Inadvertent Elective Deferrals to SEP

[In House Counsel]

We have inadvertently allowed employees to make pre-tax contributions to a SEP-IRA. Is there a way to correct this problem without requiring distributions of the deferrals? 

 

 

[Towanda]

Salary deferrals are not permitted in a SEP.  If pre-tax contributions were withheld from employee pay, they must be returned to the employees with an earnings adjustment and will be taxable. 

If the contributions were withheld from 2025 income, you may be able to work with your payroll provider to reverse the transactions for W-2 reporting purposes once the funds are returned.  Any gains on those deposits should be reported on Form 1099-R.  

If anything can go wrong in a SEP, it will go wrong.  It's a fact  

[PensionPete]

If I remember correctly, the last year a SARSEP could be established - which allowed pre-tax salary deferrals - was 1996.  Surprised a custodian would accept the funds - unless they didn't know the contribution source.

Towanda is on point on the correction. The funds have to be distributed out of the accounts. The custodian will be required to file 1099Rs.