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



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

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 PDF) 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. If your SARSEP plan document is out of date (i.e. pre-2002), you likely have a problem that requires fixing.

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 plans for current law. For employers with model SEP plans to avail themselves of the latest law changes, they must have adopted the latest model Form 5305-SEP (for EGTRRA, it must have a revision date of March 2002 or later. The instructions for the Form 5305-SEP, with a December 2004 revision date, provide that if you used the March 2002 version of the form to establish a model SEP plan, you aren't required to use the December 2004 form). If using a pre-approved SEP plan, the updated plan needed to be adopted within 180 days after the date the IRS issued a favorable opinion letter on the EGTRRA amended document. Most SEP plans needed to have adopted an updated plan (or model form) for the EGTRRA changes by the end of 2002.

Employers had to notify employees who participate in these plans of the increased EGTRRA contribution limits no later than October 1, 2002. See Revenue Procedure 2002-10 (as modified by Announcement 2002-49). Individually designed SEPs that have received a ruling from the IRS should use the procedures listed in Revenue Procedure 2002-10, section 4.07. Any other SEP outside of the correction periods discussed above should have amended their plan back in 2002 and given proper notice to participants before the new limits were used.

Correction programs available:

Self-Correction Program:

This mistake can't be corrected under SCP.

Voluntary Correction Program:

If the plan is not under audit, Employer Y may make a VCP submission to the IRS under Revenue Procedure 2021-30 via the website following the procedures in Section 11. Employer D, use Form 14568, Model VCP Compliance Statement, PDF including Form 14568-C, Model VCP Compliance Statement - Schedule 3: SEPs and SARSEPs PDF to identify the failure and describe how it's being fixed. User fees for VCP submissions are generally based upon the current value of all IRAs that are associated with the SEP plan.

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 plan sponsor and the IRS enter into a closing agreement outlining the corrective action and negotiate a sanction that is not excessive, considers facts and circumstances, and bears a reasonable relationship to the nature, extent and severity of the failures, based upon all relevant factors described in section 14 of Rev. Proc. 2021-30.

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.

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