SIMPLE IRA Plan Fix-It Guide - You didn’t deposit employee elective deferrals timely



Find the Mistake

Fix the Mistake

Avoid the Mistake

7) You didn’t deposit employee elective deferrals timely. Compare the dates on which you withheld the elective deferral contributions and the dates on which you contributed them to the employees’ SIMPLE IRAs. Make corrective contributions for each employee equal to the missed earnings for the period the deposits were late. Establish procedures to ensure that the employees’ elective deferrals are made per the employees’ elections and are timely deposited.

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.

Generally, plans that benefit employees other than an owner-employee (and spouse) are subject to the Department of Labor rules, which 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 your 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:

Corrective action:

If you didn’t deposit employee elective deferrals timely, make an additional contribution of the earnings that the contributions would’ve accrued if they were timely contributed.

If it isn't 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.

Correction programs available:

Self-Correction Program:

If you fail to pay contributions to the IRAs on time, but meet the other eligibility requirements of SCP, you might be able to use SCP to correct the mistake. You’d have to determine whether:

  • Appropriate practices and procedures were originally in place to facilitate compliance with requirements for calculating and depositing the elective deferrals.
  • The failure is insignificant.

Voluntary Correction Program:

Under VCP, correction is described under “Corrective action,” above. If the plan isn’t under audit you may make a VCP submission to the IRS under Revenue Procedure 2021-30PDF via the website following the procedures in Section 11. Plan sponsors are encouraged to make their VCP submission using model document Form 14568, Model VCP Compliance StatementPDF, and narrative attachments to identify the failure and describe how it’s being fixed. User fees for VCP submissions are generally based upon the current value of all IRAs that are associated with the SIMPLE plan.

Audit Closing Agreement Program:

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. 2021-30.

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 depositing elective deferrals. Examples of administrative procedures include using checklists, software and manuals outlining the steps for depositing employee elective deferrals.

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.)

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