SEP plan Fix-It Guide — Common problems, real solutions

 

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 PDF or SEP prototype plan document is the current revision (December 2004) Adopt revised Form 5305-SEP or IRS-approved SEP prototype plan document. Maintain regular contact with the company that sold you the plan
2. Employees of related businesses were excluded from participating
 
Identify any companies that you own or with which you have a financial relationship Apply reasonable correction method that would place affected employees in the position they would've been in if there were no operational plan mistakes Determine if you own any other businesses
3. Eligible employees were excluded from participating
 
Review plan sections on eligibility and participation and check when employees are entering the plan Corrective contribution that would place affected employees in the position they would've been in if there were no operational plan mistakes Review the participation status of all employees at least once a year
4. Contributions to participants’ SEP-IRAs were miscalculated because the  wrong definition of compensation was used

 

Review the SEP plan document to determine if you’re using the proper compensation for allocations
 
Correction is based on the terms of the plan in effect at the time of the mistake
 
Review the SEP plan document terms to ensure that you're considering the correct amount of compensation when calculating contributions
5. Contributions to each participant’s SEP-IRA weren't a uniform percentage of the participant’s compensation
 
Divide contributions by compensation for each employee
 
Corrective contribution that would place affected employees in the position they would've been in if there were no operational plan mistakes After the initial calculation of allocations based on the SEP plan document's terms, verify that all proposed contributions are based on a uniform percentage of participants’ compensation
6. Contributions to the SEP-IRA exceeded the maximum legal limits
 
Determine the total contribution made for each employee and make sure that amount does not exceed the lesser of:
  1. 25% of that employee’s compensation, or
  2. the dollar limitation for that year ($69,000 for 2024; $66,000 for 2023; $61,000 for 2022; $58,000 for 2021 and $57,000 for 2020)
Either distribute or retain the excess amount After the initial calculation of allocations based on the terms of the SEP plan document, check to make sure none of the proposed allocations would violate the law

SEP Overview
EPCRS Overview
SEP Checklist PDF
IRA-Based Plans Additional Resources