SIMPLE IRA Plan Fix-It Guide – You made incorrect employer contributions for eligible employees
Find the Mistake
Fix the Mistake
Avoid the Mistake
6) You made incorrect employer contributions for eligible employees.
Review records to determine if you timely deposited employer contributions.
Contribute make-up amounts, adjusted for earnings through the date of correction. For excess contributions, distribute them or use the retention method.
Establish procedures to ensure that employer contributions are equal to the amount provided for in the annual notice and 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.
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 your records to determine if you deposited the contributions by the required dates.
How to fix the mistake:
If you contributed less than was required
If you miscalculated employer contributions and contributed less than required by the SIMPLE IRA plan document and annual notice, you must contribute make-up amounts, adjusted for earnings through the date of correction.
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 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.
If you contributed more than was required
If you contributed more than the amount required by the terms of your SIMPLE IRA plan document and annual notice, then you should correct by using either the:
- Distribution Method - effect distribution for the excess amount, as adjusted for earnings (see Revenue Procedure 2016-51 section 6.11(5)(a)). The earnings adjustment will be based on the actual rates of return of the participant’s SMPLE IRA account from the date(s) that the excess deferrals were made through the date of correction.
- 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 an amount to the IRS that is at least 10% of the excess amount. This is in addition to the Voluntary Correction Program user 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 employer contributions by not following the SIMPLE IRA plan document terms and annual notice, 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 described under “Corrective action,” above. If the plan isn't under audit, you may make a VCP submission using the model documents in Form 14568, Model VCP Compliance Statement, including Form 14568-D, Model VCP Compliance Statement - Schedule 4: SIMPLE IRAs. Include Forms 8950 and 8951. The user 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 amount to the IRS equal to 10% of the excess amounts.
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. 2016-51.
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. Examples of administrative procedures include using checklists, software, manuals and methods for calculating compensation and required contributions.
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.