SIMPLE IRA Plan Fix-It Guide – Employer contributions weren’t given to terminated eligible employees

Mistake

Find the Mistake

Fix the Mistake

Avoid the Mistake


8) Employer contributions weren’t given to terminated eligible employees.

Review employee payroll data to determine if eligible employees terminated during the year and if they were eligible to receive a contribution.

Make corrective contributions to place affected employees in the position they would have been in if no mistake was made.

Establish administrative procedures to ensure that you make an employer contribution for all eligible employees whether or not they terminated employment during the year.

An employer must make either matching or nonelective contributions to all eligible employees. A SIMPLE IRA plan can't require an employee to be employed on a particular day, such as the last day of the year, to receive matching or nonelective contributions.

How to find the mistake:

Review employee payroll information to determine if any employee terminated employment during the year. Determine whether terminated employees covered under the plan received an employer contribution for the year of termination.

How to fix the mistake:

Corrective action:
Make an employer contribution for each eligible employee who didn’t receive a contribution for the year. You must also make a contribution of the earnings that the employer contribution would've earned, determined from the date you should've made the contribution until the date you actually made it. If it isn’t feasible to determine what the actual investment results would have been, you may use a reasonable rate of interest, such as the Department of Labor’s Voluntary Fiduciary Correction Program Online Calculator.

Correction programs available:

Self-Correction Program (SCP):
If you failed to follow the SIMPLE IRA plan terms when making employer contributions and the other eligibility requirements of SCP are satisfied, you might be able to use SCP to correct the mistake. You have to determine whether:

  • Appropriate practices and procedures were originally in place to facilitate compliance with who was eligible to receive employer contributions.
  • The failure is insignificant.

Voluntary Correction Program (VCP):
If the plan isn’t under audit, you may submit this failure to the IRS via the VCP using the model document in Form 14568, Model VCP Compliance Statement, and Form 14568-D, Model VCP Compliance Statement - Schedule 4: SIMPLE IRAs. The user fee for VCP submissions is generally based upon the current value of all IRAs that are associated with the SIMPLE IRA plan. For example, if the value is between $0 and $500,000, the user fee is $1,500. If the value of all IRAs exceeds $500,000, the user fee will be higher. See Rev. Proc. 2018-52 for instructions on making a VCP submission to the IRS.

 
 Audit Closing Agreement Program (Audit CAP):
If this mistake is discovered on audit, it may be corrected under Audit CAP. Correction of the plan under Audit CAP should be very similar to correction under SCP. The plan sponsor and the IRS enter into a closing agreement outlining the corrective action and negotiate a sanction that is not excessive, considers facts and circumstances, and bears a reasonable relationship to the nature, extent and severity of the failures, based upon all relevant factors described in section 14 of Rev. Proc. 2018-52.

How to avoid the mistake:

Review the SIMPLE IRA plan rules for employer contributions. Establish administrative procedures that include listing all eligible employees who should receive an employer contribution for each year. The list should include all eligible employees whether or not they terminate employment in that calendar year.

Correcting Plan Errors
SIMPLE IRA Plan Fix-It Guide
SIMPLE IRA Plan Overview
EPCRS Overview
SIMPLE IRA Plan Checklist (pdf)
IRA-Based Plans Additional Resources

 

IRS.gov / Retirement Plans / Correcting Plan Errors / Fix-It Guides / SIMPLE IRA Plan Fix-It Guide / Potential Mistake