Mistake Find the mistake Fix the mistake Avoid the mistake 6. Contributions to the SEP-IRA exceeded the maximum legal limits Determine the total contribution made for each employee and make sure that amount does not exceed the lesser of: 1) 25% of that employee’s compensation, or 2) the dollar limitation for that year ($69,000 for 2024; $66,000 for 2023; $61,000 for 2022; $58,000 for 2021; $57,000 for 2020) Either distribute or retain the excess amount After the initial calculation of allocations based on the terms of the plan, check to make sure none of the proposed allocations would violate the law All contributions made to a SEP are employer contributions. Internal Revenue Code Sections 402(h) and 415 limit the amount of contributions made to an employee’s SEP-IRA to the lesser of dollar limitation for the year $69,000 for 2024 ($66,000 for 2023; $61,000 for 2022; $58,000 for 2021; $57,000 for 2020; $56,000 for 2019 and $55,000 for 2018) or 25% of the employee’s compensation. The amount of compensation taken into account is also limited $345,000 for 2024 ($330,000 for 2023; $305,000 for 2022; $290,000 in 2021; $285,000 in 2020; $280,000 in 2019 and $275,000 in 2018). If your SEP plan document specifies lower contribution limits, then the lower limits control. There are special rules if you're self-employed, such as a partner or an owner-employee. When calculating the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment, which takes into account both the deduction for one-half of your self-employment tax and the deduction for contributions to your own SEP-IRA. For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan. For more information on the deduction limitations for self-employed individuals, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). Employer contributions to a SEP-IRA won't affect the amount you can contribute to a Roth IRA or a traditional IRA. However, it may preclude you from receiving a tax deduction for contributions to a traditional IRA. See Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), for details. How to find the mistake Calculate 25% of each employee’s compensation limited to $345,000 in 2024 ($330,000 in 2023; $305,000 in 2022; $290,000 in 2021, $285,000 in 2020, $280,000 in 2019 and $275,000 in 2018) and compare the total contribution made for the employee to the lesser of that amount or the dollar limitation for that year $69,000 for 2024 ($66,000 for 2023; $61,000 for 2022; $58,000 for 2021, $57,000 for 2020, $56,000 for 2019 and $55,000 for 2018). Review the special calculations in Publication 560 for self-employed individuals. How to fix the mistake Corrective action There are two alternative methods to correct a failure to limit employer contributions to employees. The amount in excess of the annual limit, adjusted for earnings through the date of correction, should be distributed from the affected employee’s SEP-IRA and returned to the employer. The distributed amount is not included in the income of the affected employee, but is reported on Form 1099-R with a taxable amount of zero. If it isn’t feasible to determine what the actual investment results would’ve been, you may use a reasonable rate of interest, such as the interest rate used by the Department of Labor’s Voluntary Fiduciary Correction Program Online Calculator. Alternatively, if a submission is made under the VCP program, the excess amount may be retained in the SEP-IRA, but only if the plan agrees to enter into a closing agreement and pay an additional amount to the IRS via an imposed sanction that is equal to at least 10% of the excess amount, excluding earnings. Note that the additional compliance fee will not apply if the excess amount is under $100. Under both correction methods, the plan sponsor is not entitled to a deduction for the excess contributions. Example: Employer I maintains a SEP plan. For the 2018 year, the contributions made for two employees, T and U, exceeded the limit in IRC Section 415. Employee T had an excess of $3,000 and U had an excess of $300. The failure is discovered in 2019. Generally, Employer I would have to get employees T and U to take the excess money, adjusted for earnings, out of each SEP-IRA by taking distributions and returning the funds to the plan sponsor. Correction programs available Self-correction Program The example illustrates an operational problem because the employer failed to follow the plan terms by improperly exceeding the 402(h) and 415 limitations provided for in the plan document and the Internal Revenue Code. If the other eligibility requirements of SCP are satisfied, Employer I might be able to use SCP to correct the mistake. Employer I would have to determine whether: Practices and procedures were originally in place to facilitate compliance with requirements regarding maximum contribution limits. The failure is insignificant. If the failure is significant then correction would have to occur by 12/21/21. Voluntary Correction Program Under VCP, correction is the same as described above under “Corrective action.” If the plan is not under audit, Employer I may make a VCP submission via the Pay.gov website following the procedures set forth in Revenue Procedure 2021-30 PDF, Section 11. Consider, using Form 14568, Model VCP Compliance Statement PDF, including Form 14568-C, Model VCP Compliance Statement - Schedule 3: SEPs and SARSEPs PDF. User fees for VCP submissions are generally based upon the current value of all IRAs that are associated with the SEP plan. For example, if the value is between $0 and $500,000, the user fee is $1,500 if the submission is made in 2019. User fees may change in subsequent years. If the value of all IRAs exceeds $500,000, the user fee will be higher. If the mistake includes excess amounts contributed to the employees' IRAs associated with the SEP, the employer must use VCP if the employer wishes to allow the excess amounts to remain in the affected participants’ IRAs. If this correction method is used, a special additional payment of at least 10% of the excess amount will apply. This is in addition to the VCP submission user fee. Audit Closing Agreement Program Under Audit CAP, correction is the same as described above under “Corrective action.” Employer I and the IRS enter into a Closing Agreement outlining the corrective action and negotiate a sanction that is not excessive, considers facts and circumstances, and bears a reasonable relationship to the nature, extent and severity of the failures, based upon all relevant factors described in section 14 of Rev. Proc. 2021-30. How to avoid the mistake After the initial calculation of allocations based on the terms of the SEP plan document, you should check to make sure none of the proposed allocations would violate Internal Revenue Code Sections 402(h) and 415. If there’s a problem, you can adjust it before you transfer the money into the SEP-IRAs. SEP Fix-it Guide SEP overview EPCRS overview SEP checklist PDF IRA-based plans additional resources
