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Failure of employer to follow all Simple-IRA steps


Guest Moe Howard2
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I dont know if the IRS audit guidelines permit an agent to interview or question any person other than the taxpayer subject to the audit because of all the legal rights and disclosure which must be given to a taxpayer by the IRS before an audit begins. Secondly, I dont think the employees would be comfortable being interviewed by an IRS agent who is auditing the employer.

I dont understand the first part of your post- it appears contradictory.

mjb

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Guest Moe Howard2

Sure, the IRS can interview anyone that is willing to volunteer to be interviewed (with employer's permission). The employer would have to first make contact with the employees and ask if they would explain to IRS (or give IRS a statement) that they were notified by employer about the 3% match/ 2% contribution. This is all the proof that the IRS needs.

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Picture this....

I am sitting at my desk- trying to make sure I complete my daily tasks on time. My boss suddenly comes strolling down the aisle, saying something about a SIMPLE IRA. :blink: I have no idea what he is talking about. I don’t even know what an IRA is. :unsure: No one else seems interested- so I figured it could not be important. :lol: I continued with my work, and didn’t even think about the matter farther. I can’t even remember the subject matter if I tried .

A few years later, my boss asks me to tell the IRS that he did tell me about the SIMPLE. “What? What is a SIMPLE” I said? You mean you would have given me money (free money) if I had put money in my account? OK, I said. I will do what you ask…( 'cause I thought...after all, you conduct my review and determine if I get a raise and and and…

So the IRS agent interviews me a few weeks later.

Did your boss tell you about the retirement plan?

No. I said.

Did he not tell you about a SIMPLE IRA plan?

Oh- yes he did. A few years ago he told us at our desks.

What did he tell you?

Ummm...he said if I had put money in, he would have given me free money. Man!!If I had known that then, I would have certainly put money in. But I did not know that he would have given me money until he reminded me a few weeks ago...

Ah ha…said the agent…

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FWIW, the DOL/IRS in a joint project wrote a publication called "Simple IRA Plans for Small Businesses." It refers to the Simple-IRA "Summary Description" as a "document" which is consistant with DOL regulations. In addition, it states that the employee must receive an "annual election notice."

In any event, unless it can be proved that a "proper" summary description and "proper" annual notice were provided timely (since an unofficial alternate method was chosen), there is (IMO) no notice. There is also a $50 per day penalty that would appear to be applicable.

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Guest Moe Howard2

Gary, you're in left field.

No one in this topic post has said that the summary description can be anything but written. No one has said that an eligible employee does not have to receive an election notice.

The questions are: Does the IRS require that the notification of 3% match/2% contribution have to be written ? and Must the election notice (salary reduction agreement) that the employee must receive, have to be written?

The IRS has not defined the words.... receive, notice, or notify.

According to Webster's dictionary:

Receive = Accept

Notice = Announcement

Notify = Inform

An "unofficial alternate method was chosen" ... what does that mean?

Show me in the tax code were it says what the official method is for notifying an employee about the 3% match/2% contribution and the official method of how the employee is required to communicate his decision to defer or decline deferrals.

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Guest Pensions in Paradise

inane = lacking significance, meaning, or point

You just confirmed that the summary description must be written. No written summary was provided to employees. Therefore, it is irrelevant whether the notice can be given verbally since the sponsor did not comply with the notice requirements by distributing a written summary description.

End of discussion, the sponsor did not comply with the notice requirements.

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Guest Moe Howard2

Pen, good point.

But suppose the employer had given written summary description to employees & verbal notice re: 3% match/2% cont and right to deferral. Is verbal notification an acceptable method of notification ?

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Moe, you seem to want to tell the client their verbal notice was ok and they are free and clear and to me it seems you are grasping for straws to support this argument.

To me it seems worthwhile to see if the service will let you put in the 3% for the staff for the affected years and continue the plan or terminate the plan (and probably at a minimum require the client to pay taxes and any applicable penalties on their contributions) as I would not advise a client to do anything that would not follow the law.

Another option may be to let the client know that if caught on audit the penalties are as follws: and let them chose. You are free to advise your client as you choose. The other members of this board are giving you their take on the situation. Good Luck.

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Here's the law-- SPJPA Sec 1421(d) MODIFICATIONS OF ERISA.--

Note that (from below) "3) EMPLOYEE NOTIFICATION.--The employer shall notify each employee immediately before the period for which an election described in section 408(p)(5)© of such Code may be made of the employee's opportunity to make such election. Such notice shall include a copy of the description described in paragraph (2). Did the verbal notification include a "copy" of the description provided bt trustee/custodian?

(d) MODIFICATIONS OF ERISA.-- 

(1) REPORTING REQUIREMENTS.--Section 101 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1021) is amended by redesignating subsection (g) as subsection (h) and by inserting after subsection (f) the following new subsection:

'(g) SIMPLE RETIREMENT ACCOUNTS.--

'(1) NO EMPLOYER REPORTS.--Except as provided in this subsection, no report shall be required under this section by an employer maintaining a qualified salary reduction arrangement under section 408(p) of the Internal Revenue Code of 1986.

'(2) SUMMARY DESCRIPTION.--The trustee of any simple retirement account established pursuant to a qualified salary reduction arrangement under section 408(p) of such Code shall provide to the employer maintaining the arrangement each year a description containing the following information:

'(A) The name and address of the employer and the trustee.

'(B) The requirements for eligibility for participation.

'© The benefits provided with respect to the arrangement.

'(D) The time and method of making elections with respect to the arrangement.

'(E) The procedures for, and effects of, withdrawals (including rollovers) from the arrangement.

'(3) EMPLOYEE NOTIFICATION.--The employer shall notify each employee immediately before the period for which an election described in section 408(p)(5)© of such Code may be made of the employee's opportunity to make such election. Such notice shall include a copy of the description described in paragraph (2).'

(2) FIDUCIARY DUTIES.--Section 404© of such Act (29 U.S.C. 1104©) is amended by inserting '(1)' after '©', by redesignating paragraphs (1) and (2) as subparagraphs (A) and (B), respectively, and by adding at the end the following new paragraph:

'(2) In the case of a simple retirement account established pursuant to a qualified salary reduction arrangement under section 408(p) of the Internal Revenue Code of 1986, a participant or beneficiary shall, for purposes of paragraph (1), be treated as exercising control over the assets in the account upon the earliest of--

'(A) an affirmative election with respect to the initial investment of any contribution,

'(B) a rollover to any other simple retirement account or individual retirement plan, or

'© one year after the simple retirement account is established.

No reports, other than those required under section 101(g), shall be required with respect to a simple retirement account established pursuant to such a qualified salary reduction arrangement.'

(e) EFFECTIVE DATE.--...

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Guest Pensions in Paradise

I could not locate anything which states that the notice cannot be given verbally, assuming of course that the verbal notice contains all of the necessary information. However, as we all agree (I believe), the summary description must be distributed in a written format.

So here's my take on the two scenarios you have presented:

1. No written summary description distributed, only verbal notice given - employer is subject to $50/day penalty since the employer did not comply with the notice requirements.

2. Written summary description distributed, verbal notice given - I would say the employer has complied with the notice requirements.

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In general a notice has to get to the intended recipient. Posted notices are not always sufficient. What may be practical for a small employer may be impractical for a large employer. The issue is probably more of whether the mode of distribution is going to get it out to those that need (or are required) to know something and whether it came across. The employer's election notification does not appear to require that it be in writting, but an undocumented verbal notification provides absolutely no assurance that it came across (or for that matter, ever provided to employees). The fact that everyone is passing up a 100% match is testament to that. A video presentation would have been better. Many firms require that their employee sign and return their election form, even if the choose not to participate.

OTOH, if a fair cross section of new and old nonowner employees elected to participate, then the 408(p)(2)©(ii)(II) verbal notice is ARGUABLY good

Moe, "unofficial alternate method..." refers to the SIMPLE "Summary Description" under DOL regulations (see above post quote) rather than a full blown "Summary Plan Description" otherwise required for a Title I plan under ERISA.

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Guest Moe Howard2

Gary thanks for your comments ... [Moe, you're welcome; thanks for your participation and contributions to this message board.---gsl]

.... but my sole question has always simply been ...Does the IRS require that the employer notification of "3% match/2% contribution" or "salary reduction agreement (employee election to defer)" have to be written? And finally the answer to that question is NO.

I realize that it's best (for many reasons) to have them written, but I never asked about or was concerned about which method is best. I only wanted to know if a written requirement existed.

Thanks to everyone for their thoughts & comments. You were all helpful!

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"

.... but my sole question has always simply been ...Does the IRS require that the employer notification of "3% match/2% contribution" or "salary reduction agreement (employee election to defer)" have to be written? And finally the answer to that question is NO."

At the risk of beating a dead horse, I remain unconvinced that the IRS will buy this argument. Maybe they will - I don't know. I wonder what would happen if your client applied for a PLR on this issue - would the IRS say OK, or would they come up with a resounding NYET? If you actually end up negotiating with them on this case, I'd love to hear the results. Of course, in this specific case, it sounds like the question is moot anyway, since they never provided the written SPD anyway, so they are up the creek regardless of the outcome of the Notice issue.

Keep us posted if you hear anything from the IRS on this. For any of you that may be attending ASPPA conferences, etc., this might be a good question to "pre submit" so the IRS can discuss from the podium? While I know such discussion is unofficial, it is helpful in determining their general opinion. Thanks.

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Guest Moe Howard2

Bel, I'm not interested in what the IRS buy's or thinks. I'm not interested in what an IRS agent ,conducting a seminar, thinks. I'm only intersted in knowing if any written law, regulation, etc requires that the 2%/3% notice & salary reduction agreement notice be in writting. No one has shown me where such a written requirement exists. To "give someone a notification" means to notify them. If the method of notification is not stipulated ... then "notify" can be accomplished by verbal (if receiver can hear), written (if the receiver can read), or sign language (if the receiver understands sign language).

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