S corp shareholder simple deferrals not deposited

[cpa2000]

There are lots of topics on this forum about employers not depositing deferrals for unrelated employees (sad!).  This is a little different - all non-owner employee deferrals and matches were deposited timely.  The deferrals for the 1 shareholder-employee were not deposited.  There are 2 years worth of deferrals and match not paid in.  If this were a non-owner employee there's only 1 option to fix this ... deposit what is owed plus missed earnings.  

The company does not have the cash flow to deposit the late deferrals and match.  This is the 100% shareholder.  Is there an option to not deposit the deferrals and match in some way...  amend W-2s and tax returns to change these deferrals to shareholder loan repayments?   Any creative ideas that would simplify the process?

No other employees have participated in this plan in 2 years.  

I appreciate your help!

[Gary Lesser]

See topic "egregious SIMPLE IRA violations by employer" on this board--

Simples can be very unforgiving. The only possibility I have heard of is for client to "sleep with one eye open." Arguably, there is no simple; all contributions for those 2 years are excess contributions and subject to the tax on nondeductible contributions. There are no rules regarding the excess amounts in the IRAs.

Under the EPCRS, the service might allow amounts that are in plan to remain, but charge a 10% penalty, plus sanctions.  I may have more information (informal advice) in a few weeks on how lenient--if at all--the DOL would be in such a situation. 

Are you absolutely sure the owner elected to have amounts deferred into the plan? Any chance owner opted out?

If there was an opt out, it is unclear if the 50% participation rate test would be satisfied for applicable years based on your facts.]

Hope this helps.

 

 

[cpa2000]

Thank you for responding.  His W2 for both years shows simple IRA deferrals.  He did not fill out an annual election form.  Could we undo it as an accounting mistake.... saying his intent was to end the simple ira 2 years ago?  Currently he  is having amounts withheld from his paycheck on a shareholder loan.  Is there any way to undo this simpler... ha ha pun not intended... vs. amend 2 years of 1040s and s corps changing from simple ira to shareholder loan repayment?  This is whole thing is yuck yuck yuck.  :(

[cpa2000]

He made no deposits for himself for 2014 and 2015 (no deferrals 2016) so excess contributions would not apply.  Amounts were withheld and excluded from income but not paid in.

[Gary Lesser]

So, your saying that there was no deferral election form in force (i.e., it was either terminated or expired two years ago). Therefore, the amounts should not have been withheld and the W-2 need amending. [Just to confirm, there are no other employees for 2014 and 2015, and the funds withheld were in no way set aside.]

OTOH, wages were withheld as elective deferrals for two years and reported to the participant and IRS as elective deferrals. I think recharacterization as a loan could be risky for you (as CPA). Amending the W-2's and filing amended tax returns may be simpler and closer to how the Service might perceive this. There are risks, including audit risks, but it seems reasonable under the circumstances. I am not too sure about the election form argument; unless you can keep a straight face .

All of the EPCRS/DOL cases that I have been involved with (mostly doing spreadsheets) have involved employers with employees; perhaps others have experiences with "only owner" situations and will have something to add.  

[cpa2000]

For the year in question.... There are 2 employees who participated + the shareholder.  All employee deferrals were paid in 100%.  All deferrals for shareholder were not paid in - not one penny.  This was 3 years ago.  Over the next year no employees participated, owner had deferrals but zero paid in.  Then last year no one had deferrals, nothing paid in.

[cpa2000]

It sounds like the client really needs to use the VCP process and can certainly ask the IRS if they can amend w2s to remove the simple deferral that never got paid in for those 2 years.  If I decide to refer the client to someone who can help them through the VCP process.... where do I send them?  How do you find a practitioner skilled in the vcp process?  thanks!