Form 5305a-Sep - Salary Reduction Simplified Employee Pension - Individual Retirement Accounts Contribution Agreement Page 6
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Form 5305A-SEP (Rev. 6-2006)
Page
Instructions for the Employee
If you do not withdraw excess elective
Section 402(g) Limit
deferrals and any allocable income by April
The following instructions explain what a
Section 402(g) limits the maximum amount of
15, the excess elective deferrals will be
simplified employee pension (SEP) is, how
compensation you can defer in each calendar
subject to the IRA contribution limits of
contributions to a SEP are made, and how to
year to all salary reduction SEPs, SIMPLE IRA
sections 219 and 408 and will be considered
treat these contributions for tax purposes. For
plans under section 408(p), section 403(b)
excess contributions to your IRA. Such
more information, see the SEP agreement on
salary reduction arrangements, and cash or
excess deferrals are subject to a 6% excise
pages 1 and 2 and the Instructions for the
deferred arrangements under section 401(k),
tax for each year they remain in the SEP-IRA.
Employer beginning on page 2.
regardless of the number of employers you
The excise tax is reported in Part III of Form
may have worked for during the year. This
5329.
What Is A SEP?
limit is $15,000 for 2006 and later years. After
Income earned on excess elective deferrals
2006, the $15,000 amount may be increased
A SEP is a written arrangement (a plan) that
is includible in your gross income in the year
for cost-of-living adjustments. If you are 50 or
allows an employer to make contributions
you withdraw it from your IRA. The income
older before the end of the calendar year, you
toward your retirement without becoming
should be withdrawn by April 15 following the
can defer an additional amount of
involved in more complex retirement plans. A
calendar year in which the deferrals were
SEP may include a salary reduction
compensation (“catch-up elective deferral
made. If the income is withdrawn after that
arrangement, like the one provided on this
contributions”) during the year. The limit on
date and you are not 59
1
⁄
years of age, it
2
form. Under this arrangement, you can elect to
catch-up elective deferral contributions is
may be subject to the 10% tax on early
have your employer contribute part of your pay
$5,000 for 2006 and later years. After 2006,
distributions. Report the tax in Part I of Form
the $5,000 amount may be increased for
to your own traditional individual retirement
5329. Also see Pub. 590 for a discussion of
cost-of-living adjustments.
account or annuity (traditional IRA), set up by
exceptions to the age 59
1
⁄
rule.
2
you or on your behalf with a bank, insurance
For a highly compensated employee, there
Excess SEP Contributions
company, or other qualified financial
may be a further limit on the amount you can
institution. The part contributed is tax
defer. Figured by your employer and known
If you are a highly compensated employee,
deferred. Only the remaining part of your pay
as the deferral percentage limitation, it limits
you may have excess SEP contributions for a
is currently taxable. This type of SEP is
the percentage of pay that a highly
calendar year that may have to be withdrawn
available only to an employer with 25 or fewer
compensated employee can elect to defer to
from your SEP-IRA. If you have excess SEP
eligible employees.
a SEP-IRA. Your employer will notify any
contributions that do not have to be
highly compensated employee who has
The traditional IRA must be one for which
withdrawn (because you had unused
exceeded the limitation.
the IRS has issued a favorable opinion letter or
catch-up elective deferral contributions), the
a model traditional IRA published by the IRS
following rules on including the contributions
Tax Treatment
as Form 5305, Traditional Individual
in income, withdrawing the contributions, and
Elective deferrals that do not exceed the
Retirement Trust Account, or Form 5305-A,
penalties if you don’t withdraw them do not
limits discussed above are excluded from
Traditional Individual Retirement Custodial
apply to these excess SEP contributions.
your gross income in the year of the deferral.
Account. It cannot be a SIMPLE IRA (an IRA
Your employer must notify you of any excess
They are not included as taxable wages on
designed to accept contributions made under
contributions, whether or not they must be
Form W-2, Wage and Tax Statement.
a SIMPLE IRA Plan described in section
withdrawn. This notification should show the
However, elective deferrals are treated as
408(p)) or a Roth IRA.
amount of the excess SEP contributions, the
wages for social security, Medicare, and
amount that must be withdrawn, the calendar
Your employer must provide you with a
unemployment (FUTA) tax purposes.
year to include any excess contributions in
copy of the SEP agreement containing
income, and the penalties that may be
eligibility requirements and a description of the
Excess Amounts
assessed if the contributions that must be
basis upon which contributions may be made.
There are three situations which will result in
withdrawn are not withdrawn from your IRA
All amounts contributed to your IRA belong
excess amounts in a salary reduction
within the applicable time period.
to you, even after you quit working for your
SEP-IRA.
Your employer must notify you of the
employer.
1. Making excess elective deferrals (for
excess SEP contributions by March 15
Forms and Publications You May
example, amounts in excess of the section
following the calendar year for which you
402(g) limit). You must determine whether you
Use
made the excess SEP contributions.
have exceeded the limit in the calendar year.
Generally, you include the excess SEP
An employee may use either of the two forms
contributions in income for the calendar year
2. Highly compensated employees who
and the publications listed below.
in which you made the original deferrals. This
make excess SEP contributions (for example,
● Form 5329, Additional Taxes on Qualified
may require you to file an amended individual
amounts in excess of the deferral percentage
Plans (including IRAs) and Other Tax-Favored
income tax return. However, any excess SEP
limitation referred to above). The employer
Accounts. Use Form 5329 to pay tax on
contribution less than $100 (not including
must determine if an employee has made
excess contributions and/or tax on early
allocable income) must be included in income
excess SEP contributions.
distributions.
in the calendar year of notification. Income
3. Having disallowed deferrals (for example,
● Form 8606, Nondeductible IRAs. Use Form
earned on these excess contributions must
more than half of your employer’s eligible
8606 to report nondeductible IRA
be included in your gross income when you
employees choose not to make elective
contributions.
withdraw it from your IRA.
deferrals for a year). All elective deferrals
● Pub. 590, Individual Retirement
You must withdraw these excess SEP
made by employees for that year are
Arrangements (IRAs).
contributions (and allocable income) from
considered disallowed deferrals, as discussed
● Pub. 560, Retirement Plans for Small
your IRA. You may withdraw these amounts
below. Your employer must also determine if
Business (SEP, SIMPLE, and Qualified Plans).
without penalty, until April 15 following the
there are disallowed deferrals.
calendar year in which you were notified by
Elective Deferrals
Excess Elective Deferrals
your employer of the excess SEP
Annual Limitation
contributions. Otherwise, the excess SEP
Excess elective deferrals are includible in your
The maximum amount that you may defer to a
contributions are subject to the IRA
gross income in the calendar year of deferral.
contribution limits of sections 219 and 408
SEP for a calendar year is limited to the
Income earned on the excess elective
and will be considered an excess contribution
smaller of 25% of compensation or the section
deferrals is includible in the year of
to your IRA. Thus, the excess SEP
402(g) limit. The 25% limit is reduced if your
withdrawal from the IRA. You should
contributions are subject to a 6% excise tax
employer makes nonelective contributions on
withdraw excess elective deferrals and any
reportable in Part III of Form 5329 for each
your behalf to this or another SEP for the year.
allocable income by April 15 following the
year the contributions remain in your IRA.
In that case, the total contributions on your
year to which the deferrals relate. These
behalf to all such SEPs may not exceed the
If you do not withdraw the income earned
amounts may not be transferred or rolled over
smaller of $44,000 (this is the amount for
on the excess SEP contributions by April 15
tax-free to another IRA.
2006; for later years, it may be increased for
following the calendar year of notification by
cost-of-living adjustments) or 25% of
your employer, the income may be subject to
compensation.
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