SIMPLE IRA Plan Fix-It Guide – You made incorrect or untimely employer contributions or employee elective deferrals for eligible employees
Find the Mistake
Fix the Mistake
Avoid the Mistake
6) You made incorrect or untimely employer contributions or employee elective deferrals for eligible employees.
Compare the dates on which you withheld the elective deferral contributions and the dates on which you contributed the deferrals to employees’ SIMPLE IRA accounts. Review employee data, payroll remittances and other records to determine if your deposited employer contributions timely.
Make corrective contributions for each employee equal to the missed earning for the period the deposits were late.
Establish procedures to ensure that the employees’ elective deferral contributions are made per the employees’ election and employer contributions are equal to the amount in the annual notice and are timely deposited.
The required employer contributions to a SIMPLE IRA plan must be either:
- 2% of an employee’s compensation regardless of whether they made an elective deferral contribution; or
- a matching contribution equal to an employee’s elective deferral contribution (up to 3% of the employee’s compensation).
Prior to November 2, the beginning of the 60-day election period prior to each calendar year, you must notify the employees of which contribution you will provide in the following year.
You may reduce the 3% matching contribution to a lower percentage, but not lower than 1%. You may not lower the 3% for more than 2 of 5 years ending with the year the reduction is effective. You may not lower the 2% fixed contribution.
You have until the due date, including extensions, of your business’s tax return to deposit matching or nonelective contributions in the employees’ SIMPLE IRAs for that year.
IRS rules require you to make the elective deferral contributions no later than 30 days following the month in which you withheld the deferrals from the employee’s salary.
If your plan is subject to Department of Labor rules, you may have to deposit employees’ deferrals sooner. Department of Labor rules require you to transfer your employees’ elective deferral contributions to their SIMPLE IRA accounts at the earliest date on which the employer can reasonably segregate the contributions from the employer’s general assets. There is a 7-day safe harbor to deposit elective deferrals for which most SIMPLE IRA plans would qualify. Generally, plans that benefit employees other than an owner-employee (and spouse) are subject to the Department of Labor rules.
How to find the mistake:
Review plan document provisions relating to employer contributions. Based on those provisions and compensation data, calculate the employer contribution for all employees. Compare the calculation with the amounts you actually contributed for the employees. If the amounts contributed differ, then it is possible you are not following the plan’s terms.
Review employee data and other records to determine if you made timely contributions.
For each pay period, review the date on which you withheld the elective deferral contributions from the employees’ salary (typically the same date that you paid the net salaries to the employees) and compare with the date on which the elective deferral contributions were deposited to the employees’ SIMPLE IRAs. If the deposits weren't made by the earliest applicable deadline, you have a problem.
How to fix the mistake:
If you miscalculated elective deferrals and employer contributions and contributed less than required by the SIMPLE IRA plan document, you must contribute make-up amounts, adjusted for earnings through the date of correction. For corrective contributions from understated elective deferrals, follow the corrective action for Mistake #5.
In addition to transferring the withheld elective deferrals to the employees’ SIMPLE IRAs, you should make a contribution equal to the amount that those deferrals would have earned from the date that you should have deposited them through the date of the actual deposit. If it’s not feasible to determine what the actual investment results would’ve been, you may use a reasonable rate of interest, such as the interest rate used by the Department of Labor’s Voluntary Fiduciary Correction Program Online Calculator.
If you didn’t make the employer contributions timely, make an additional contribution of the earnings that the contributions would’ve accrued if they were timely contributed.
If you contributed more than the amount required by the terms of your SIMPLE IRA plan document, then you should correct by using one of the following methods:
- Distribution Method - effect distribution for the excess amount, as adjusted for earnings (see Revenue Procedure 2013-12 section 6.11(5)(a)).
- When the excess amount is because of:
- elective deferrals - distribute and report on Form 1099-R as taxable for the year in which the distribution is made.
- employer contributions - distribute to the plan sponsor rather than to the participants and report on a Form 1099-R issued to the participant, with a taxable amount of zero.
- Retention Method – retain excess amounts in the SIMPLE-IRA. The plan sponsor must pay a special fee of at least 10% of the excess amount in addition to the VCP submission fee.
Small excess amounts. If the total excess amount is $100 or less, distribution isn’t required and the special additional VCP fee doesn’t apply.
- When the excess amount is because of:
Correction programs available:
If the employer fails to follow the terms of the SIMPLE IRA plan document by miscalculating elective deferrals or employer contributions or fails to pay contributions to the IRAs on time, and the other eligibility requirements of SCP are satisfied, you might be able to use SCP to correct the mistake (if no excess monies are allowed to remain in the affected participants’ IRAs). You’d have to determine whether:
- Appropriate practices and procedures were originally in place to facilitate compliance with requirements regarding the calculation and/or payment of the elective deferrals and employer contributions.
- The failure is insignificant.
Voluntary Correction Program:
Under VCP, correction is the same as described above under “Corrective action.” If the plan is not under audit, you may make a VCP submission using the model documents in Appendix C, including Schedule 4. You must include Forms 8950 and 8951.The fee for the VCP submission is $250. You must use VCP if you wish to allow excess amounts to remain in the affected participants’ IRAs and you’ll have to pay an additional compliance fee equal to 10% of the excess amounts.
Audit Closing Agreement Program:
If this mistake is discovered on audit, you may correct it under Audit CAP. Correction of the plan under Audit CAP should be very similar to correction under SCP. The sanction under Audit CAP is a percentage of the maximum payment amount.
If there’s a late payment of contributions, you should also correct this mistake under the DOL’s Voluntary Fiduciary Correction Program.
How to avoid the mistake:
The individuals administering the SIMPLE IRA plan should be familiar with the terms of the plan document. After learning the key provisions of the plan document, the administrator can make sure that the plan procedures ensure compliance with them. Examples of administrative procedures include checklists, software, manuals, methods for calculating compensation, calculations of the required employer contributions and methods for deposit and allocation.
Review the SIMPLE IRA plan rules concerning the timing of employer contributions and adopt administrative procedures to implement proper timing. Create a procedure that will alert you to:
- the upcoming due date for employer contributions, and
- check whether you made the necessary contributions.
Establish plan administrative procedures to ensure that you've made employees’ salary deferral contributions to the employees’ SIMPLE IRAs shortly after you withheld the amounts from their paychecks. (Note: The DOL timeframe for timely deposit is shorter than the IRS timeframe. Therefore, if your plan is subject to the DOL rules, you should use the DOL timeframe as the criteria for designing administrative procedures.)