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SIMPLE IRA deferrals - are they employee assets or employer's?


Guest amfam2
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I represent a financial institution which sells SIMPLE IRAs to small businesses. (Non DFI only).

I have an employer who sent us employee salary deferrals for a terminated employee. However, by the time the funds were sent to us the ee had already closed the account.

We have a $50 minimum in order to open an account.

Administratively we are wrestling with the question of what should we do w/the term ee's funds. Should we pay it to ee or return it to er? Please keep in mind that the funds are never deposited into the participant's [closed] account.

My research tells me that there is no IRS/DOL guidance.

I believe that it is appropriate to return the funds to the employer. It is then up to the employer to decide whether it will refund the deferrals to the term ee or open an account w/another vendor who may accept amounts under $50.

Another position presented to me is that it would be appropriate for us to forward the ee deferrals onto the term ee outside of the SIMPLE IRA arrangement. I disagree (along w/the fact that there is no distribution code in the 1099 instructions which describes this transaction). The reasoning provided to me under this alternative is that after payroll has run (i.e. the assets are now "separated from the employer"), the assets are now the ees assets and not the employer's.

Lastly - does anyone know how the DOL views the employee deferrals to SIMPLE/SARSEPs? Are they employer assets or employee assets or plan assets. Citations would be helpful.

Thanks,

jlg

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The funds belong to the employee- not the employer-the employee, in accordance with a salary deferral agreement made with the employer, chose to have the amount contributed to the SIMPLE IRA.

Sound like you may need to make an exception to your policy and deposit the funds to a SIMPLE IRA account for this participant.

You cannot send the funds directly to the participant without depositing the funds to the SIMPLE IRA, since any amount of $10 or more must be reported to the IRS and the participant on form 1099-R.

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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  • 2 weeks later...

If the employee is unable or unwilling to open an IRA (or can not be located) the employer MUST open the account on behalf of the employee (at any financial institution) if it is to have a SIMPLE-IRA (for any employee) for the year. See Notice 98-4, Q&A, G-5 and G-6]

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Since it sounds like this does not cross year ends - I would send it back to employer, let them reclass the amount and return it to the participant.

Since W-2's not done this would be the easiest.

JanetM CPA, MBA

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Since there is no SIMPLE IRA account, I see no reason why it can't be returned to employer for timely deposit into an existing SIMPLE IRA. The account must be established - see above.

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