Tax & Accounting Blog

IRS Finds Common Errors in Forms 1099-R and 5498 for Simplified Employee Pension (SEP) Accounts

1099, 6050W, Cost-Basis Reporting, Document and WorkFlow Management, Information Reporting for Wealth Management, ONESOURCE, Tax Information Reporting, Trust Tax, Withholding Management June 28, 2012

The IRS recently released the report of an SEP Plan Compliance Check project conducted by the Employee Plans Compliance Unit. The compliance check found numerous errors made by SEP plan sponsors and the financial institutions that file information returns to report SEP-IRA contribution information. As part of this project, the IRS contacted financial institutions and plan sponsors for a compliance check, which involved verification of information but was not an audit and not an on-site examination of books and records.

The SEP Plan Compliance Check focused on SEP plan sponsors and others who received a Form 5498 showing an SEP contribution. The format of the compliance check was a questionnaire and, depending on information reported in the questionnaire returned to the IRS, some plan sponsors and financial institutions received follow-up requests for additional information.

The general finding was that SEP plan sponsors are exceeding annual contribution limits; SEP plan sponsors are excluding eligible employees, some of whom are employees of controlled groups; and, financial institutions are failing to properly complete Form 5498, IRA Contribution Information, for SEP-IRAs.

For plan sponsors, excess plan contributions led the list of common errors. Causes of excess plan contributions included simply making contributions in excess of the annual limit; failing to remove plan earnings in addition to excess SEP contributions; failing to consider earnings when removing excess SEP contributions; and, participating in a SEP and in another related plan and not combining contributions from both plans when determining annual limits.

Where excess contributions have been made and then returned, note that the Form 1099-R Instructions specify: “If excess employer contributions (other than elective deferrals), and the earnings on them, under SEP, SARSEP, or SIMPLE IRA plans are returned to an employer (with the participant’s consent), enter the gross distribution (excess and earnings) in box 1 and 0 (zero) in box 2a. Enter Code E in box 7.”

The IRS compliance check also found plan participation errors, such as including only highly compensated employees and their spouses; permitting family members to enter the plan sooner than other employees who met the eligibility requirements; excluding eligible employees in a company in an employer’s controlled group; and, maintaining an SEP plan for highly compensated employees and a different plan for other employees.

For financial institutions holding SEP-IRAs and filing Forms 5498 to report contributions, the following errors were noted:

  • Rollover contributions erroneously shown as SEP contributions in box 8 of the Form 5498; these should be reported in box 2
  • Transferred contributions used to purchase annuities erroneously reported by the receiving insurance companies as SEP contributions in box 8