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Late Contributions & No Match to a SIMPLE IRA


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3 replies to this topic

#1 ButchElfers

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Posted 03 March 2004 - 01:49 PM

If an employer withholds money for months from an employees paycheck for a SIMPLE IRA, but does not fund the account until months later, what are the requirements? Is the employer responsible for earnings growth which would have occurred in the account?

The employer is considering refunding the money withheld, to the employee, because they do not have the money to cover the required 3% employer contribution. Other than refiling last years W-2's, what problems do you see with that approach?

#2 Gary Lesser

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Posted 03 March 2004 - 07:47 PM

DOL issues aside (for the moment), the failure to deposit the funds within 30 days as required by IRC section 408(p)(5)(A)(i) suggests that there is, already, no valid SIMPE IRA. It's an administrative requirement. [See IRC 408(p)(1)(A)]

The DOL/EBSA has a VOLUNTARY FIDUCIARY CORRECTION PROGRAM. In general, the EBSA will issue to the applicant a no action letter with respect to a breach identified in the application of an eligible person or entity and the breach is corrected. Pursuant to the no action letter it issues, the EBSA will not initiate a civil investigation under Title I of ERISA regarding the applicant's responsibility for any transaction described in the no action letter, or assess a civil penalty under ERISA Section 502(l) on the correction amount paid to the plan or its participants. The failure to timely transmit participant contributions is an eligible transaction. The emloyer must pay the expenses associated with the correction process, such as appraisal costs or the cost of recalculating participant account balances. It must also restore to the plan the principal amount involved, plus the lost earnings.

Back to the plan (if it even exists, see above), the failure to make the matching contribution (a separate and distinct issue) will invalidate the plan for the year. State law issues may also apply because of the employer's promise to deferrals match for the year.

Hope this helps. That being said, if no contributions were made to plan (and I think they have been made), I wouldn't be surprised if the fix you mentioned (repay as wages) is adopted by the employer. If any contributions were made, then a cummulative 10 percent penalty may apply until nondeductible contribution corrected (which may presuppose that the DOL issue is addressed and the contributions and earnings deposited).

CAUTION: There are also more severe (some criminal) penalties possible under ERISA. More facts, especially details, would be more helpfull, but I think that the employer should consult with a competant ERISA/Tax Attorney. Plan and owners clearly have IRS problems and very likely problems under ERISA as well. Making the 3 percent contribution is probably the least expensive fix (and the DOL late deferral issue fixed). But again, read first line of this reply. A PLR may be needed to address the 30-day deposit administrative requirement rule. The IRS's EPCRS procedure may also be used to treat nonegregious failures and certain qualification failures.

#3 Suds Sucker

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Posted 04 March 2004 - 11:39 AM

Thanks Gary,
To give you a little more information, contributions were made for withholdings through April of last year. From then on, money was withheld, but not deposited.

The employer is going to fund everyones account and make up lost earnings to correct the situation. The employer will also make the matching 3% contribution to everyone's account.

A couple more questions. . .

1) Do we have to file with the EBSA to get a 'no action letter'?
2) Do we have to make up lost earnings for one of the owners accounts, or can we just contribute their withholdings and 3% employer match?
3) You had mentioned a 10% penalty. Is that applicable to this situation?
4) This situation won't disqualify the plan, will it?

#4 Gary Lesser

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Posted 04 March 2004 - 02:19 PM

1) Do we have to file with the EBSA to get a 'no action letter'?

Yes. See VFCP program at 67 Fed Reg 15051-15060 and PTE 2002-51 (67 Fed Reg 227, 70623-70628)

2) Do we have to make up lost earnings for one of the owners accounts, or can we just contribute their withholdings and 3% employer match?

Yes, the restortation must be complete.

3) You had mentioned a 10% penalty. Is that applicable to this situation?

Not if there are no excesses or if W-2 used to correct any excesses.

4) This situation won't disqualify the plan, will it?

Probably not (if corrected). If the EBSA accepts the late contribution, the IRS is likely to follow. There is no guidance on the plan qualification issue (if it is an issue), other than to say it is probably correctable under EPCRS procedures.