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Excess deferral to SIMPLE IRA - change W-2?


Guest J Samuelson
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Guest J Samuelson

If an employer who has a SIMPLE IRA in place,lets an employee defer $6500 instead of $6000 (it was supposed to be $250 for 24 pay periods, but they have 26 pay periods), does the W-2 need to be corrected to reflect the $6000 max allowed? It seems if the W-2 gets corrected AND a 1099 is issued, the employee will be double taxed on the excess.

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The return of the excess is not taxable. Any gain removed (required if before due date) is taxable and probably subject to the 25% penalty. I sugest that employer provide letter of explaining excess so that employee can show it to trustee/custodian and request that "an excess contribution" is being removed. [Note: there are no citations or IRS provided rules; but are my best educated guess. I do concurr with incluion on the W-2, otherwise employer subject to 10% penalty for a nondeductible contribution.] Trustee can split the amount being distributed (excess and gain).

[Position updated below by GL]

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  • 15 years later...

What about a person who was 'reasonably' expected to earn $5,000 (plan imposed limit) in the current year, was allowed to defer, but did not earn the requisite $5,000 in the year. Are all salary deferrals returned as excess because the employee was not eligible? Or can the salary deferrals stay in the plan since it was 'reasonably' expected the person would earn $5,000. What about the match - do they still get that as well? We now know the person did not earn the requisite amount to be eligible before the match contribution is to be made.

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  • 1 month later...

It has been 15 years since the above post has resurfaced. The "excess" amount would likely be taxable when distributed (although the approach mentioned above could work). The amount here exceeded the annual limit ($6,000) for the year 2000 and the excess should have been included in box 1 and in box 12.

THE IRS FIX IT GUIDE STATES: ...If you contributed more than the amount required by the terms of your SIMPLE IRA plan document, then you should correct by using either the: Distribution Method - effect distribution for the excess amount, as adjusted for earnings (see Revenue Procedure 2013-12 section 6.11(5)(a)).... Retention Method - retain excess amounts in the SIMPLE-IRA. The plan sponsor must pay a special fee of at least 10% of the excess amount. This 10% fee is in addition to the Voluntary Correction Program submission fee. Small excess amounts.... If the total excess amount is $100 or less, you aren't required to distribute the excessand aren't subject to the special additional fee . Correction programs available: Self-Correction Program: If you miscalculate the elective deferrals or employer contributions by not following the SIMPLE IRA plan document terms, or fail to pay contributions to the IRAs on time, but meet the other eligibility requirements of SCP, you might be able to use SCP to correct the mistake (if noexcess monies are allowed to remain in the affected participants' IRAs)....

SPECIFICALLY, Rev. Proc. 2013-12, § 6.11(5)(a) reads.

(5) Treatment of Excess Amounts under a SEP or a SIMPLE IRA Plan. (a) Distribution of Excess Amounts. For purposes of this section 6.11, 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.

And I agree with Bird on the point raised by the PensionMonster.

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