Answer

The employer is required to treat the excess amount as part of her W-2 wages and provide her with a notification of the excess amount. The notification should include information about the excess amount, being added to the amount of wages reported on her W-2.

The employee should notify her IRA custodian of the excess nondeductible SEP contribution amount. The custodian should in turn adjust the transaction, so that the excess amount is reported as an IRA contribution and not a SEP employer contribution. She may want to include a reminder to that effect in her notification to the custodian.

If the amount creates an http://retirementdictionary.com/definitions/excesscontribution excess IRA contribution, then she should remove it as a distribution of an excess contribution (return of excess contribution), or she will owe the IRS a penalty of 6% of the excess amount for each year it remains in the IRA. Click here for information about the deadline to remove an excess contribution.

If it does not create an excess contribution, she may leave the amount in her IRA as http://retirementdictionary.com/definitions/contribution ‘IRA contribution’, or remove it as a http://retirementdictionary.com/definitions/distribution distribution of an excess contribution (return of excess contribution). An IRA contribution can be removed as a return of excess contribution, even if it did not create an excess contribution.