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SIMPLE 401 (k)


12AX7
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I've taken over a SIMPLE (k) Plan and the deferrals for two participants have exceeded the maximum including catch-up contributions for the 2008, 2009 and 2010 plan years.

When the excess deferrals get removed from the plan, are these amounts only subject to taxation in 2011 (if distributed this year)? In other words, is there any other penalty for late removal of the excess deferrals? Thanks.

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FWIW I would think that it would be the same as 401(k) excess deferrals. If not removed by April 15th of the following year, they are taxed twice. They are taxed in the year the deferrals are made. (Yes this would mean going back and amending tax returns.) And they would be taxed in the year distributed.

Does anyone know why a SIMPLE plan, IRA or 401(k) would be different?

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Jim, I'm inclined to think you're way if I could find it somewhere in the code, regs or elsewhere. The closest I can come is in Rev. Proc. 2008-50 regarding excess deferrals in a SEP or SIMPLE IRA Plan:

(5) Treatment of Excess Amounts under a SEP or a SIMPLE IRA Plan. (a)

Distribution of Excess Amounts. For purposes of section 6.10, an Excess Amount is an

amount contributed on behalf of an employee that is in excess of an employee’s benefit

under the plan, or an elective deferral in excess of the limitations of §§ 402(g) or

408(k)(6)(A)(iii). If an Excess Amount is attributable to elective deferrals, the Plan

Sponsor may effect distribution of the Excess Amount, adjusted for earnings through the

date of correction, to the affected participant. The amount distributed to the affected

participant is includible in gross income in the year of distribution. The distribution is

reported on Form 1099-R for the year of distribution with respect to each participant

receiving the distribution. In addition, the Plan Sponsor must inform affected participants

that the distribution of an Excess Amount is not eligible for favorable tax treatment

accorded to distributions from a SEP or a SIMPLE IRA Plan (and, specifically, is not

eligible for tax-free rollover). If the Excess Amount is attributable to employer

contributions, the Plan Sponsor may effect distribution of the employer Excess Amount,

adjusted for earnings through the date of correction, to the Plan Sponsor. The amount

distributed to the Plan Sponsor is not includible in the gross income of the affected

participant. The Plan Sponsor is not entitled to a deduction for such employer Excess

Amount. The distribution is reported on Form 1099-R issued to the participant indicating

the taxable amount as zero.

Is is reasonable to treat excess amounts in a SIMPLE (k) the same way?

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