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Deducted Simple Contributions from Employee but never signed employee up for plan nor ever gave any notice of participation


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I need some advice.. this is a sad and difficult situation. I was in the insurance and financial service industry for over 20 years. I moved &left an agency I ran after 20 yrs to take care of an ailing parent. Previously I was a reg rep for my co and actually handled our own simple for our office.. Esp since “i” shares were available because we actually did retirement planning at the time. This preface is why I feel so dumb! After my dads death I went back to work for a different agent, he advised at hire he provided a simple with a 3% match ,i also took the job on contingency he provide some type of group health. I was overwhelmed already in an environment that was seriously non compliant & sub par regarding just client accounts. If I ever brought up a compliance issue only wanting to help or resolve it was met with disdain as if I was trying to “ run the show” and reminded who’s name was on the door and that he was a CFP! After leaving for another position ( that was worse,lol ???‍♀️) I realized he had been deducting 3% for my Simple contribution every two weeks but I never did a risk tolerance tool, any paperwork,nor got correspondence ever. I texted him to inquire “ where my Simple was” his response was “i don’t know and why would I know where your investments are”? My response was simply “?”, I waited until the next day hoping he was in a mental crisis @ the time and send him another text explaining he had been deducting the 3% contribution .. again the shocking response was “ that’s news to me and I guess I owe you some $” I was mortified but still trying to not burn a bridge and replied “ oh well you saved me the 10% penalty because I need the $” then  just waited another few days because I was praying he’d do the right thing and at least offer to repay me my contributions plus the 3% match , i decided to just suck up the market loss ( which was huge?), he said he’d have to contact his cpa although I told him I had my last stub showing the 3% he deducted. Sadly a week later he sends me a text that says “ damn it “ I owe you $XXX which was EXACTLY MY Contribution! I have not responded at all since then ! I also found out his only former competent staff set up the plan 5 yrs ago! He has hired multiples of ppl since then and I have no doubt he has  neither done their paperwork to start their Accts nor has he been even sending in the contributions for former employees within prescribed times if at all! On one hand I want to help him still get out of this mess on the other I just want my $ plus match promised and not cause anymore animosity.  Telling him again the ramifications of his actions will only make me look like the “know it all” again and be met with an unpleasant outcome.  I don’t even want to disclose what happened with the health ins in this thread now. I knew I was in trouble when he told me “ Men have vulnerable egos & his  wife was a better man than he was”??‍♀️??‍♀️?help!  what is he potentially facing and how can I help him without hurting myself further ? Thanks, Serious Idiot ?

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Paying you the amount due (or any other amount) directly will not eliminate the error, The employer's only recourse is to make the missing deferral and matching contributions with interest INTO THE SIMPLE IRA PLAN.. The DOL calculator may be used for this purpose. See https://www.askebsa.dol.gov/VFCPCalculator/WebCalculator.aspx.

Note that each elective deferral will require a separate calculation (generally from the next business day following the deferral. The matching contributions are due on the due date of the employers's tax return (determined without extensions if that date has passed). So, for a person paid twice a month, 25 calculations are required. You need to open a SIMPLE IRA plan. It will be easiest to establish the SIMPLE IRA at the same institution the employer maintains the SIMPLE IRA plan.

Based on what you mentioned, self-correction will take care of most of the issues regarding the IRS. But..... there may be more important issues involving the misuse of plan assets. SIMPLEs are subject to ERISA if there is at least one common-law employee participating in the plan. The DOL does not currently permit the self-correction of late deposits.The employer may need to file an application under the DOL's Voluntary Fiduciary Correction Program (VFCP) to avoid potential civil actions, penalties, and the assessment of civil penalties under Section 502(i) of ERISA. Self-correction is not available under the VFCP. A prohibited transaction excise tax filing -- Form 5330 -- (based on lost earnings) may also be required.

The DOL does not address the matching contributions. So, here's what happens. First the missing elective contributions are fixed under the DOL's VFCP program. Then the matching contributions are fixed under the IRS's program. The issues are generally fixed (restoration made) before the DOL application is submitted. Assuming no other issues, the IRS side can be self-corrected. Records of the fix are maintained by the employer.

EBSA now provides a model VFCP application form, which is available at https://www.dol.gov/sites/default/files/ebsa/employers-and-advisers/plan-administration-and-compliance/correction-programs/vfcp/model-application-form.pdf. Use of the model form is voluntary but recommended. It is important to remember to include a completed, signed VFCP checklist—a form which is also provided—as the DOL will not process the application without this document. Use of the model form is voluntary but recommended. It is important to remember to include a completed, signed VFCP checklist—a form which is also provided—as the DOL will not process the application without this document--see https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/correction-programs/vfcp/checklist.

If you need additional assistance or a referral, please call me.

The employer does not really have much of a choice, but to fix the plan. If discovered upon audit or investigation, other considerations apply & it gets very ugly.

Hope this helps. ~~Gary

 

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Gary has provided you the expert legal answer. Full disclosure: Gary is my partner in a number of books we have co-authored.  HI GARY!

However, based on your posting, I would guess this employer is NOT interested in doing it right and it is highly unlikely that he will do what is required.  Therefore, you have practical issues to consider.

The important thing is that you have been economically harmed,  In fact, it appears he has stolen money from you, a probable criminal offense.  So, you need to decide what YOU want out of this situation.  Do you just advocate for yourself?  More than likely, that is where you end up.  So, after he refuses to do the right thing, you need to point out what you are willing to accept from him as a settlement to NOT pursue both ERISA violations and possible (probable?) criminal actions.

You probably do need a good lawyer to help you sort this out. This is likely not going to be an easy situation.  Best of luck.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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