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SEP Plan Fix-It Guide - You haven't updated your SEP plan document for current law

Mistake

Find the Mistake

Fix the Mistake

Avoid the Mistake


1) You haven't updated your SEP plan document for current law

Determine if your Form 5305-SEP is the current revision (December 2004)

Adopt revised Form 5305-SEP

Maintain regular contact with the company that sold you the plan

Laws related to retirement plans change frequently. There are statutory deadlines for which many provisions must become effective. The IRS generally establishes a firm deadline for adopting these changes. Also, these law changes might mean you can simplify some areas of plan administration or improve benefits. You'll need to change plan language and operation to keep the plan within the law and to take advantage of increased benefit limits.

How to find the mistake:

At some point in the plan’s existence, you may be asked to demonstrate your plan has been in compliance with the law. This request may come from a financial institution, third-party administrator or other plan service provider, or it may come from the IRS during an audit. They may ask you to demonstrate the plan has complied with all current and prior law, sometimes reaching back several years.

You may have a plan document that is a model SEP (Form 5305-SEP, Simplified Employee Pension - Individual Retirement Accounts Contribution Agreement) or a pre-approved plan. The IRS has already favorably reviewed both model SEPs and pre-approved plans.

If your plan is a Form 5305-SEP that is the current revision (December 2004), you can be assured that it complies with the law. If your plan is a pre-approved plan, you have a level of assurance that the plan is written in compliance with the law even if you do not apply for a determination letter. Individually designed SEPs must be updated for law changes. If you have this situation, consult your tax advisor. 

How to fix the mistake:  

Corrective action:
If you haven't amended your plan timely for law changes, you should adopt the latest revision of Form 5305-SEP (December 2004) or adopt the latest revised document (approved for EGTRRA) provided by your financial institution. You'll need to confirm that the plan operation is consistent with the plan’s terms.

Example:
Employer Y established a SEP in 1995 using a prototype plan and hasn’t amended the plan document for any subsequent tax law changes.

The Economic Growth and Tax Relief Reconciliation Act of 2001 changed many of the Internal Revenue Code requirements and limits for qualified plans and IRAs. To benefit under these new provisions, employers must amend their SEP prototype and individually designed plans for current law. For employers with model SEP plans to avail themselves of the latest law changes, they must adopt the latest model Form 5305-SEP (for EGTRRA it must have a revision date of March 2002 or later). 

Correction programs available:

Self-Correction Program:
This mistake cannot be corrected under SCP.

Voluntary Correction Program:
Employer Y didn’t adopt an updated plan document timely and the plan isn’t under audit, so Y may make a VCP submission to the IRS under Revenue Procedure 2013-12. Y is encouraged to make its VCP submission using the model documents in Appendix C, including Forms 8950 and 8951. The fee for the VCP submission is $250.

Audit Closing Agreement Program:
If this mistake is discovered on audit, it may be corrected under Audit CAP. Correction of the mistake under Audit CAP should be very similar to correction under VCP. The sanction under Audit CAP is a percentage of the maximum payment amount.

How to avoid the mistake:

If you’re using an IRS SEP model plan (Form 5305-SEP), visit the IRS website before the end of each calendar year to see if the IRS has updated the model plan. If there’s a newer version of the form, read the instructions to determine if it’s necessary to adopt it.

If you’re using a financial institution’s SEP prototype, check with that financial institution to ensure that there are proper procedures in place ensuring that they send any required updates you need to sign in a timely manner. Keep signed and dated copies of your plan document and any amendments for your records.

SEP Fix-It Guide
SEP Overview
EPCRS Overview
SEP Fix-It Guide (pdf)
IRA-Based Plans Additional Resources

IRS.gov / Retirement Plans / Correcting Plan Errors / Fix-It Guides / SEP Fix-It Guide / Potential Mistake

Page Last Reviewed or Updated: 15-Jan-2014