Form 5305-A-Sep - Salary Reduction And Other Elective Simplified Employee Pension - Individual Retirement Accounts Contribution Agreement Page 4

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Form 5305A-SEP (Rev. 6-2006)

Page

Your notification to each affected employee

excess SEP contributions arose, the SEP no

contributions that exceed the limit in Article

of the disallowed deferrals must clearly state:

longer will be treated as meeting the rules of

IIIB(1) or IIIC or the section 402(g) limit

section 408(k)(6). In this case, any

applicable to employees under 50. No more

● The amount of the disallowed deferrals;

contribution to an employee’s IRA will be

than $220,000 (this is the amount for 2006; for

● The calendar year in which the disallowed

subject to the IRA contribution limits of

later years, it may be increased for

deferrals and earnings are includible in gross

sections 219 and 408 and thus may be

cost-of-living adjustments) of compensation

income; and

considered an excess contribution to the

per individual is taken into account. The

● That the employee must withdraw the

employee’s IRA.

deferral percentage of an employee who is

disallowed deferrals (and allocable income)

eligible to make an elective deferral, but who

Your notification to each affected employee

from the IRA by April 15 following the

does not make a deferral during the year, is

of the excess SEP contributions must

calendar year of notification by the employer.

zero. If a highly compensated employee also

specifically state in a manner written to be

Those disallowed deferrals not withdrawn by

makes elective deferrals under another salary

understood by the average employee:

April 15 following the year of notification will

reduction SEP maintained by the employer,

● The amount of the excess SEP

be subject to the IRA contribution limits of

then the deferral percentage of that highly

contributions attributable to that employee’s

sections 219 and 408 and thus may be

compensated employee includes elective

elective deferrals;

considered an excess contribution to the

deferrals made under the other SEP.

● The amount of these excess SEP

employee’s IRA. For the employee, these

contributions that must be withdrawn;

disallowed deferrals may be subject to the

2. Affiliated employer includes (a) any

● The calendar year in which the excess SEP

6% tax on excess contributions under section

corporation that is a member of a controlled

4973. If income allocable to a disallowed

contributions that must be withdrawn are

group of corporations, described in section

deferral is not withdrawn by April 15 following

includible in gross income; and

414(b) that includes the employer, (b) any

the calendar year of notification by the

● Information stating that the employee must

trade or business that is under common

employer, the employee may be subject to

withdraw the excess SEP contributions that

control, defined in section 414(c) with the

the 10% tax on early distributions under

must be withdrawn (and allocable income)

employer, (c) any organization that is a

section 72(t) when withdrawn.

from the SEP-IRA by April 15 following the

member of an affiliated service group, defined

Disallowed deferrals should be reported the

calendar year of notification by the employer.

in section 414(m) that includes the employer,

same way excess SEP contributions are

Excess contributions not withdrawn by April

and (d) any other entity required to be

reported.

15 following the year of notification will be

aggregated with the employer under

subject to the IRA contribution limits of

regulations under section 414(o).

Restrictions on Withdrawals

sections 219 and 408 for the preceding

3. A highly compensated employee is an

calendar year and may be considered excess

Your highly compensated employees may not

individual described in section 414(q) who:

contributions to the employee’s IRA. For the

withdraw or transfer from their SEP-IRAs any

a. Was a 5% owner defined in section

employee, the excess contributions may be

SEP contributions (or income on these

416(i)(1)(B)(i) during the current or preceding

subject to the 6% tax on excess contributions

contributions) attributable to elective deferrals

year; or

under section 4973. If income allocable to an

made for a particular calendar year until

excess SEP contribution is not withdrawn by

b. For the preceding year had compensation

March 15 of the following year. Before that

in excess of $95,000 (if the preceding year

April 15 following the calendar year of

date, however, you may notify your

notification by the employer, the employee

was 2005, $100,000 if the preceding year was

employees when the deferral percentage

may be subject to the 10% tax on early

2006) and was in the top-paid group (the top

limitation test has been completed for a

distributions under section 72(t) when

20% of employees, by compensation). For

particular calendar year and that this

withdrawn.

later years, the amount may be increased for

withdrawal restriction no longer applies. In

cost-of-living adjustments.

general, any transfer or distribution made

For information on reporting excess SEP

before March 15 of the following year (or

contributions that must be withdrawn, see

Excess SEP Contributions—

notification, if sooner) will be includible in the

Notice 87-77, 1987-2 C.B. 385, Notice 88-33,

Notification

employee’s gross income and the employee

1988-1 C.B. 513, Notice 89-32, 1989-1 C.B.

may also be subject to a 10% tax on early

671, and Rev. Proc. 91-44, 1991-2 C.B. 733.

You must notify each affected employee, if

withdrawal. This restriction does not apply to

any, by March 15 of the amount of any excess

To avoid the complications caused by

an employee’s excess elective deferrals.

SEP contributions made to that employee’s

excess SEP contributions, you may want to

SEP-IRA for the preceding calendar year and

monitor elective deferrals on a continuing

Top-Heavy Requirements

what amount must be withdrawn. If needed,

basis throughout the calendar year to insure

use the model form on page 5 of these

Elective deferrals may not be used to satisfy

that the deferrals comply with the limits as

instructions. Excess SEP contributions that

the minimum contribution requirement under

they are paid into each employee’s SEP-IRA.

must be withdrawn are includible in the

section 416. In any year in which a key

Disallowed Deferrals

employee’s gross income in the preceding

employee makes an elective deferral, this

calendar year. However, if these excess SEP

SEP is deemed top-heavy for purposes of

If you determine at the end of any calendar

contributions (not including allocable income)

section 416, and you are required to make a

year that more than half of your eligible

total less than $100, then the excess

minimum top-heavy contribution under either

employees have chosen not to make elective

contributions that must be withdrawn are

this SEP or another SEP for each nonkey

deferrals for that year, then all elective

includible in the employee’s gross income in

employee eligible to participate in this SEP.

deferrals made by your employees for that

the calendar year of notification. Income

A key employee under section 416(i)(1) is

year will be considered disallowed deferrals,

allocable to these excess SEP contributions is

any employee who, at any time during the

for example, IRA contributions that are not

includible in gross income in the year of

preceding year was:

SEP-IRA contributions.

withdrawal from the IRA.

● An officer of the employer with

You must notify each affected employee by

If you do not notify any of your employees

March 15 that the employee’s deferrals for

compensation greater than $140,000 (this is

by March 15 of an excess SEP contribution

the previous calendar year are no longer

the amount for 2006; for later years, it may be

that must be withdrawn, you must pay a 10%

considered SEP-IRA contributions. Such

increased for cost-of-living adjustments);

tax on such excess SEP contribution for the

disallowed deferrals are includible in the

● A 5% owner of the employer, as defined in

preceding calendar year. The tax is reported in

employee’s gross income in that preceding

section 416(i)(1)(B)(i); or

Part VIII of Form 5330. If you do not notify your

calendar year. Income allocable to the

● A 1% owner of the employer with

employees by December 31 of the calendar

disallowed deferrals is includible in the

compensation greater than $150,000.

year following the calendar year in which the

employee’s gross income in the year of

withdrawal from the IRA.

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