Our Client Says That We’ve Incorrectly Reported His SEP Contribution—What Do We Do?
By Jodie Norquist, CIP, CHSP
If your financial organization offers simplified employee pension (SEP) plans, you probably understand why these retirement plans are used by self-employed individuals and small business owners. SEP plans are often simple to establish and easier for an employer to maintain.
But there can be confusion surrounding how to report SEP contributions. Our ERISA consultants receive frequent calls about this topic on our 800 Consulting lines. A common scenario involves a self-employed business owner receiving a Form 5498, IRA Contribution Information, and noticing that the SEP contribution that he made wasn’t reported for the tax year in which he reported the contribution on his federal tax return.
Example: A client deposits a SEP contribution for the 2022 tax year on February 22, 2023. Your financial organization doesn’t report the contribution on the client’s 2022 Form 5498. The contribution will instead be reported on the 2023 Form 5498.
The client is upset: he doesn’t think that he can deduct the SEP contribution on his 2022 tax return. And he’s worried that he’ll be audited by the IRS because of what he considers to be a financial organization mistake.
Now the client is asking your financial organization to correct his Form 5498 to show that his current-year SEP contribution is a prior-year SEP contribution. That’s when you call us.
First, know that a correction is not warranted. Your organization did not report the contribution incorrectly. Financial organizations must report SEP contributions in the year they are made, not in the year they are for. Your client, however, does the exact opposite when he files his federal tax return. He reports the SEP contribution in the year it is for, not for the year it was made.
So what do you do if your client doesn’t agree with you? Turn to the IRS for guidance. Refer your client to the 2023 Instructions for Forms 1099-R and 5498. Scroll down to the instructions for Box 8, SEP Contributions, for Form 5498, found on page 21 of the instructions.
Here’s what it says:
Similar reporting rules apply for SIMPLE IRA contributions found in Box 9, SIMPLE Contributions, on Form 5498.
Employers have until their federal tax return deadline, including extensions, to establish and make SEP contributions. While most businesses have an April 15 deadline, with an extension deadline generally until October 15, some may differ. Ultimately, if your clients have questions about their SEP plan or contribution limits, it’s a good idea to refer them to a competent tax advisor.
