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SIMPLE IRA - Ineligible Employer

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We have just found out that an accounting client, who has been operating a SIMPLE IRA since 1999, is being audited by the IRS with regards to the SIMPLE plan. We have also discovered that the number of employees earning more than $5000 for the years 1999 - 2007 are:

1999 - 2001 - under 100

2002 - 101

2003 - 93

2004 - 112

2005 - 101

2006 - 107

2007 - 111

I believe that using the 2-year grace period, the employer became an ineligible employer in 2007, although I am not sure how the employee count in 2002 might impact that.

I read an earlier post on such a problem, but it was dated some time ago and I was hopeful that someone could point me in the right direction as to how to correct this problem.

Thank you.

Kate Smith

Kate Smith

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  • 3 weeks later...
Guest lmccormick
And one wonders why we cannot let amateurs operate ANY kind of retirement plan.

Not really rocket science. Too bad the system is designed to force employers into costly and less flexible 401K plans merely because they grow. I dread the day we no longer qualify for our Simple.

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You are correct (maybe). It would appear the employer first became ineligible in 2002 (had 101 employee), but treated as an eligible employer for two more years (2003 and 2004). It was again an eligible employer in 2003 with only 93 employees. It next went over in 2004, so it was good through 2006.

However, you may have to count heads again (1999-2001 and 2003)--all employees are taken into account for purposes of the 100 employee limit (not just those earning over $5K).

Have you explored both Code and EPCRS corrections to determine which is better for client (under audit). Be sure to read the audit cap sanctions-section 14 of Rev. Proc. 2006-27, and section 6.10(5) regarding excess amounts under a SEP or a SIMPLE IRA plan.

Hope this helps.

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