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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

Employer Sent me Over contribution Notice for company Simple IRA

So now what......  I over contributed $1,890 for 2011,  $2,520 for 2012 and $3,210 for 2013.  I was presented with Franklin Templeton distribution forms and applied for the "early withdrawl of over contributions".  I am 48 years old.  I understand I will receive 1099R for the amounts that had to come out.  Only my contributions from payroll deduction were excess over the allowed contribution amounts.  The employers share deposited was correct.  How much do I have to keep aside for tax and penalties? 

My first contribution to my 401k was in April, 2009.  Since beginning in the plan, I have contributed to it every payday.  First year of overcontribution was 2011, so will I be subject to premature withdrawal penalties of 10%?  Could the 2011 over contribution be considered "less than 2 years" since my first contribution?  Do I have the higher 25% penalty for that year?  Or is the May 2014 date the money came out considered the actual point of early withdrawal from the plan......which would be more than the 2 years since first deposit into the plan by employer.  I understand I will have to pay at least a 10% pre 591/2 penalty.  Is that for every year the excess contributions remained in the account?  What about the earnings on the over contribution portion?  Does that have to come out?  Does it stay in?    And,,,,,, I'm told that there is a 6% excise tax on the over contribution amounts for every year the money stayed in the plan.   Is that a 6% tax for every year? 

I was told to take out just my overcontributions from the mutual fund at franklin templeton and had to do it by myself as employer said it is all my responsibility.  I spoke with Franklin Templeton while completing withdrawal forms.  They "guided me" on filling out the form for each year to make the three withdrawals.  Does anything get added on to my W-2 for 2014 income because of these early distributions from the Simple IRA plan made on 5/10/2014? 

Will I receive a seperate 1099R for each tax year (2011, 12, 13) or will the total taken out for the 3 years be all in one 1099R? 

Does my tax guy have to amend each year  2011 through 2013?  If so, will I have to pay additional interest and tax for each year to send in with a seperate amendment and check for each year?  

I am in the 25% fed income tax bracket.  Any idea what this may cost me and what penalties apply.  No one can tell anything and what I have found on simple plan overcontributions is very limited and confusing.  Thanks for your help.

Your employer did not notify

Your employer did not notify you until now?  Franklin Templeton will send a 2014 1099R reporting the removal of the excess contributions for each year.  Because you are under age 59 1/2, FT will issue the 1099R coded P1.  You will pay tax and a 10% penalty.  Your Employer will issue corrected W2 for each year of excess contribution.  You must amend your tax returns, effectivley paying tax on the removal of the excess amounts twice.  The year you received it and the year of deferral.  You must also pay the 6% penalty for excess amounts made in 2011 and 2012 only.     

Removal of Over Contribution to Simple IRA

Employer did not notify me of over contributions until May 2014. Removed all excess contributions immediately. As this was held in Money Market in Simple IRA, there were zero earnings on amounts withdrawn. Received 1099R's from templeton funds that combined years 2011 and 2012 into same 1099R with only a 1 marked in box 7 with taxable amount not determined indicated. 2013 amount withdrawn reported P1 in box 7 with zero taxable shown. Where do I show (what form) for the 6% excise tax on the 2011 and 2012 over contributions on prior year distributions that were taken out in 2014? Employer refuses to issue corrected W-2's for any of the 3 years there was over contribution by me into the plan, which is now removed from the plan. Says I do not have to amend any of my tax returns and should only report 1099R income this year. Should I amend all three prior year reporting the distributions for the year the income was not included in my wages? If so, does this include amending year 2013 distribution that is non taxable on 2014 1099R and was removed from the plan prior to the one year deadline?