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 you withheld the elective deferrals to the dates you contributed the deferrals to employees’ SIMPLE IRAs. Review employee data, payroll remittances and other records to see if you deposited employer contributions timely.
Make corrective contributions equal to the missed earnings for the period the deposits were late.
Establish procedures to ensure that employees’ elective deferral contributions are made per the employees’ election, employer contributions are equal to the amount in the annual notice and contributions are timely deposited.
The required employer contribution to a SIMPLE IRA plan must be either:
- 2% of an employee’s compensation regardless of whether the employee 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).
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.
Prior to November 2, the beginning of the 60-day election period, you must notify the employees of which contribution you will make in the following calendar year.
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. Generally, plans that benefit employees other than an owner-employee (and spouse) are subject to the Department of Labor rules. These rules require you to transfer your employees’ elective deferral contributions to their SIMPLE IRAs 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 qualify.
How to find the mistake:
Review plan document language for 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 differ, then it’s possible you aren’t following the plan terms.
Review employee data and other records to determine if you deposited the contributions by the required dates. For each pay period, review the date you withheld elective deferral contributions from the employees’ salaries (typically the same date that you paid employees) and compare it with the date the contributions were deposited to the employees’ SIMPLE IRAs. If the deposits weren't made by the earliest deadline, you have a plan error.
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.
If you didn’t make the employer contribution timely, make an additional contribution of the earnings that the contributions would’ve accrued if they were timely contributed. 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 contributed more than the amount required by the terms of your SIMPLE IRA plan document, then you should correct by using either the:
- 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 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. This 10% fee is in addition to the Voluntary Correction Program submission fee.
Small excess amounts. If the total excess amount is $100 or less, you aren’t required to distribute the excess and aren’t subject to the special additional fee.
- When the excess amount is because of:
Correction programs available:
If you miscalculate elective deferrals or employer contributions by not following the SIMPLE IRA plan document terms, or fail to pay contributions to the IRAs on time, but meet the other SCP eligibility requirements, 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 for calculating and paying the elective deferrals and employer contributions.
- The failure is insignificant.
Voluntary Correction Program:
Under VCP, correction is as described under “Corrective action.” If the plan isn't 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 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 you paid elective deferral contributions late, you should also correct this mistake under the DOL’s Voluntary Fiduciary Correction Program.
How to avoid the mistake:
The SIMPLE IRA plan administrators should be familiar with the plan document terms. The administrators should make sure that plan procedures follow the plan terms for the amount of contributions and depositing elective deferrals. Examples of administrative procedures include using checklists; software; manuals; and methods for calculating compensation and required contributions, and the steps for depositing and allocating them.
Review the SIMPLE IRA plan rules for the timing of employer contributions and adopt administrative procedures to make sure you pay them on time. Create a procedure that will alert you to the:
- upcoming due date for employer contributions, and
- certification that you made the 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 for designing administrative procedures.)