How to Remove Unwanted SEP IRA Contributions
A SEP IRA is a "simplified employee pension" plan that allows employers to make deductible contributions for themselves and for employees into traditional IRAs. Sole proprietors may take up to 20 percent of adjusted earned income and contribute to plans. For employees, up to 25 percent of reported W-2 income can be contributed with the maximum 2009 limit of $49,000. On occasion an employer may over contribute. For employees to avoid a 6 percent over contribution penalty, the employer will need to remove the unwanted contribution.
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Instructions
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Obtain an "SEP IRA Excess Removal" form from your plan administrator.
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Calculate the amount of the excess contribution or what you want to remove. Determine this by looking at the total allotted contribution ($49,000) and seeing the total contributions that exceed it, or by taking the income of the employee and seeing if contributions exceed 25 percent. So for an employee who made $90,000 but has contributed $25,000, about 28 percent of the contributions are in excess.
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Fill out the form including the employee name, social security number and the exact amount you wish to remove. Note that you will also have to remove any earnings on the excess contribution. So, if there was an extra $10,000 contributed and it earned $300, you will need to remove $10,300.
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File the form and withdraw the funds within six months of your tax-filing deadline. The deadline for most is April 15 but may be altered based on extensions.
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Send the excess earnings back to the employer.
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Tips & Warnings
An unwanted contribution doesn't need to be an over-contribution. The same procedures should be followed if the employer simple contributed more than it desired but doesn't need to worry about doing so to avoid a 6 percent penalty.
