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Simple Ira Overcontributions


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How are the following overcontributions in a SIMPLE IRA corrected

1. employee contributions for current tax year;

2. employer contributions for current tax year;

3. employee contributions for prior tax year; and

4. employer contributions for prior tax year?

Cites would be greatly appreciated.

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IMO, the excess amounts for current year should be included on Form W-2 as "wages." This, in turn, causes the contribution to have been made by the individual and are thus, excesses, and should be removed by April 15 with any gain. (See IRC 408(d)(4))

For the prior year, same, except that the individuals would appear to owe a 6% excise tax (for 2000) until corrected. Presumably the gain from 2000 overcontributions can remain in the account. The employer will have to pay a 10% penalt for 2000 and, unless included on amended 2000 W-2s, another 10% penalty each year until corrected (Form 5330). Arguably, the amount distributed in respect to 2000 is taxed a second time (see IRC 408(d)(5)) because it exceeds the amount allowable as an IRA contribution deduction.

The instruction for Form W-2 state that any elective contributions reported in box 1 is not included in box 13. This is the only statement made by the IRS regarding excesses.

Informally, the IRS has a different view--the SIMPLE is invalid if there is an excess of $0.01 or more. This view is not stated in writing and no correction procedure has been announced.

I hope this helps. In a conversation with the Service about a year ago, they informed me that the 6% penalty doesn't apply because a SIMPLE was not an employer plan. I brought up the correction procedures for SEPs, saying that the SEP/SARSEP and SIMPLE were indeed employer plans. This conversation was terminated because the individual I was speaking with was a moron.

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