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March 3, 2009

SEP employee excess contribution


SEP employee excess contribution

Question An employer just realized that the SEP employer contributions he made to his employee’s SEP IRA exceeded the deductible limit of 25% of her (the employee’s) W-2 wages. How can this be corrected?


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 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 ‘IRA contribution’, or remove it as a 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.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.


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