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Employee never got into SIMPLE - consequences


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I Had a call from a CPA on one of his clients. His client has a 3% matching SIMPLE IRA plan.

An employee who became eligible 3 years ago never got into the plan because the investment company sales rep left the bsuiness. Nothing ever happened since. Now the employee is leaving and the employer wants to make her "whole". She is also expecting the last matching contributions also.

Any ideas on who is at fault here ?? Can he just give her a check as a bonus for her forgone matching contributions and have her sign a hold harmless agreement ?

Any thoughts would be appreciated !

Bob

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Assuming the "only" employee was excluded, the error could be considered egregious (requiring IRS approval and higher fees to fix). In general, the employer will have to make a make up deferral (equal to half of the ADP rate) and matching contributions with reasonable interest. The amount must be restored to the plan and can not be given directly to the employee.

See example 3 in Rev Proc 2006-27.

BTW, the employer was at fault for not following plan provisions. Based on your facts, there is no one to blame but the business owner. Bet it was egregious too (e.g, consistantly and improperly covered only HCEs) (see Sec 4.11 of Rev. Proc 2006-27).

SEPs are very unforgiving if not fixed and the error discovered.

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I'm a little confused. If this is a SIMPLE, and the matching method is used, then employee participation is voluntary. Was the employee given an opportunity to defer, (via the required annual election notice) and elected not to? If so, then there's no problem. If not, then yes, the employer is at fault, and you'd want to look to Revenue Procedure 2006-27. A bonus to make her "whole" doesn't solve the problem.

And I agree with Gary, although I'll state it a little more strongly - the fact that "the sales rep left the business" isn't the cause of the failure. Employer neglect is the cause of the failure. If a client's CPA leaves the business, is the employer no longer responsible for getting a tax return filed?

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And rightfully so. You are correct, it is a SIMPLE.

If make up contributions are required, I believe it would be appropriate to make a deemed elective contribution equal to half of the HCE rate of contribution for the HCE with the highest percentage.

Any thoughts on this?[/color]

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Hi Gary - I agree, given that there is no NHC "group" to use to calculate the missed deferral percentage. The SIMPLE-IRA's don't necessarily quite "fit" with the 401(k) fixes.

So let's say this employee makes (made) $30,000 for each applicable year. Let's further assume the HC/owner was the only other person deferring, and deferred 10% each year.

That makes the "deemed" missed deferral $3,000, so there would be a basic make-up contribution of $1,500.

In addition, there has to be a correction for a match, and it seems reasonable to use the 401(k) safe harbor method for this. So, since there is a dollar for dollar match up to 3% of compensation, there would be a $900.00 make-up on the match, for a total of $2,400, times however many years this applies, plus earnings of course.

The next question is whether this can be self-corrected, or must go under VCP. This is a tricky call, and I'm frankly not sure. The program specifically states that the requirements are not meant to preclude a small employer from using the program - BUT - since this would seem to be a "significant" error, you may be beyond the allowable period, in which case VCP would be required anyway. So this will require some analysis and advice from someone who has all the data at hand.

Sound reasonable?

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Sounds reasonable to me as well.

I think we need to have some pointed questions answered in order to even begin to determine which corrective measures would apply- if any:

For instance:

  • As Belgarath indicated- was the employee provided with the notification (for any of the three years) that she had an opportunity to enter into a salary reduction agreement? If so, did she make any salary deferral contributions?

If she received the notification and she choose not to make the salary deferral contribution, then no corrections are required as she would not be entitled to a matching contribution. It seems apparent that it is not the case- but as I have leaned from experience, it is never safe to assume.

Was the matching contribution formula the one selected by the employer for all three years?

  • There is also the issue of the penalty that would apply to the business owner- and possible the financial institution- if the proper notification was not provided to the participant---$50 for each day the failure continues.

Many financial institutions do provide the notification to participants VIA mail- often as part of (or included in) their regular account statements. Participants often miss these notifications- as like many of us- they do not read their statements. In addition, the employer is also required to provide the 'Employer Contribution Notice'

The first step would be to find out if the proper notification was provided, and if so, the contribution election ( matching or non-elective) chosen by the employer for the year. For matching contributions, it should also be determined whether the percentage was reduced to an amount not less than 3%.

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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Agreed. The EPCRS application may very well have many failures to mention. If an EPCRS application were filed and no notices were given, I would suggest mentioning the failures (as required), but request a waiver of the notification failure penalties because of the correction and the steps taken to prevent future failures. It's worth a try.

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