I have clients who have excess contributions in their SEP and SIMPLE IRAs and we aren’t sure what to do with the excess contributions.

Last Updated April 4, 2009

Question:

I have clients who have excess contributions in their SEP and SIMPLE IRAs and we aren’t sure what to do with the excess contributions

Answer:

Excess amounts to SEP and SIMPLE IRAs are contributions made to an employee’s IRA in excess of certain limits. These excess amounts should be distributed from the SIMPLE IRA as soon as possible. An employer who sponsors a SIMPLE IRA may use the IRS’ Voluntary Correction Program (VCP) to correct this error. Under the VCP, if an excess amount is attributable to elective deferrals, the plan sponsor may effect distribution of the excess amount, adjusted for earnings through the date of correction, to the affected participant. The amount distributed to the affected participant is includible in gross income in the year of distribution. The distribution is reported on Form 1099-R for the year of distribution with respect to each participant receiving the distribution. In addition, the plan sponsor must inform affected participants that the distribution of an excess amount is not eligible for favorable tax treatment accorded to distributions from a SIMPLE IRA plan (and, specifically, is not eligible for tax-free rollover). If the excess amount is attributable to employer contributions, the plan sponsor may effect distribution of the employer excess amount, adjusted for earnings through the date of correction, to the plan sponsor. The amount distributed to the plan sponsor is not includible in the gross income of the affected participant. The plan sponsor is not entitled to a deduction for such employer excess amount. The distribution is reported on Form 1099-R issued to the participant indicating the taxable amount as zero.

Under the VCP, if an excess amount is not distributed from the SIMPLE IRA plan, a special fee, in addition to the VCP submission fee, will apply. The plan sponsor is not entitled to a deduction for an excess amount retained in the SIMPLE IRA plan.

Notwithstanding the above, if the total excess amount in a SIMPLE IRA plan, whether attributable to elective deferrals or employer contributions, is $100 or less, the plan sponsor is not required to distribute the excess amount and the additional fee described in the preceding paragraph does not apply.

For additional information, see:

This is a Q&A presented by the IRS and answered by the IRS. Q&A is verbatim from the March 2008 issue of the IRS Employee Plans Newsletter