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SIMPLE IRA - Lots of Problems


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Company has SIMPLE IRA.

They do not want to fund any match for 2009 and they have never given out notices to the eligible employees.

They want to terminate the plan but have already withheld from the 3 participants' first paycheck in 2010.

They seem to think they do not have to fund a match if it is not "feasible". I told them the must fund at least 1%.

I don't know how you terminate a SIMPLE IRA. Just stop making contributions?

I told them they should refund the amounts already withheld from the participants wages but she couldn't figure out how to do that because of the taxes, etc.

I guess I have 2 actual questions:

1. Must they fund a match for 2009, and since they never told the participants they were getting anything, may it be 1% instead of 3%?

2. How do they terminate this plan?

Thank you.

Kate Smith

Kate Smith

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Under these circumstance, the plan can be fixed under the EPCRS. The percentage is deemed to be 3% and the employer will have to contribute 50% of the amount the emploees could have deferred had they been given the opportunity to participate. In addition, that amount has to be matched at 3%. In both cases, adjusted for earnings. See Rev.Proc. 2008-50, Appendix F, Part I, Section D. "Failure to provide eligtible employees with the opportunity to make elective deferrals."

The plan can be terminated effective 1/1/11, provided the termination occurs on or before November 1, 2010. Notify the trustee/custodian that the employer will not be making contributions for the next plan year and that it wants to terminate its contract or agreement. The employees must also be notified of the termination. [sIMPLE, SEP, and SARSEP Answer Book Q&A 14:108; see also Pub. 4334]

The adoption of a qualified plan for 2010 would also invalidate the SIMPLE IRA for 2010 and cause all contributions to the SIMPLE IRA to be excess contributions. Problems will occur if the excess amounts (adjusted for earnings) are not withdrawn from the SIMPLE IRAs by the participants. Arguable, the excess amounts are to be reported in box 1 of Form W-2 and the total deferral shown in box 12. This failure can also be fixed under the EPCRS, but the correction method is different.

Hope this helps.

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