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'lost' SIMPLE IRA deferrals

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A participant had deferrals deducted from the paycheck for around 2 years.

Unlike all other particpants, this money never made it to the IRA, no one knows for sure what happened, possibly the $ ended back into the company itself.

Granted it is not a qualified plan, what is the correction?

Do you simply deposit the amount that was deducted (it is known from the W-2s), plus the match and put it in a SIMPLE IRA.

How would you calculate earnings?

Penalty for failure to timely deposit the deferred amounts?


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SIMPLE IRA plans are not currently covered by the EPCRS. It is possible that the IRS district office would use the general delegation order dealing with closing agreements [D.O. 97].

If the money was indeed deducted from the employee's pay check and not timely forwarded, then there has been a prohibited transaction under ERISA. It is also entirely possible that someone has stolen the funds. I'd suggest hiring an ERISA attorney and consider dealing with the local IRS. If the accountant can't find it, then perhaps the local police should be notified. Surely, the funds can be traced.

In regard to the SIMPLE IRA - it is now a "complex" and all of the contributions (for the years involved) are excess contributions and should be reported on corrected W-2 forms. The employer is also subject to the 10% tax on nondeductible contributions.

The IRS has not issued any guidance on excess SIMPLE IRA contributions. It is interesting to note that Form 5329 does not provide for such excess. Form 5330 doesn't seem to apply either because a SIMPLE IRA is not a traditional IRA (which is provided for).

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Since a SIMPLE IRA is not a qualified plan none of the rules for restoring plan amounts apply. There is also a question of the extent to which the SIMPLE plan is subject to the fiduciary provisions of ERISA since the contributions are not made to a trust but to an IRA owned by the employee. However, the failure to make contributions may be subject to State labor law governing the payment of wages and benefits. At the minimum the employee contributions and match should be restored to the plan along with interest. You need to check with the accountant for the employer to determine what should be done about any deduction claimed in a prior year which was not made. If the employee is a non HCE then restoring the amount should not affect the nondiscrimination rules provided the DC limits are not exceeded for 2002. The biggest risk the client faces is a law suit/ employment action under state labor law.


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