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M Norton

SIMPLE IRA sponsor wants to skip true-up

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Sponsor of SIMPLE IRA has employee who did not elect to defer until mid year.  Then she deferred 7% until the end of the year.  Employer pays match up to 3% each pay period.  At end of year, the employee had averaged, say, 3.5% and should receive 3% match on full year compensation.  Employer says he doesn't want to pay true-up, that he put it in each pay period and because she chose not to start making deferrals until mid year, he should not have to pay the additional match.

Is that an option in a SIMPLE IRA?

What are the risks of not making the additional match contribution?

The employee is unaware that she may be entitled to additional ER match.

Thanks!

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What does the plan document say?

If it is the IRS 5304 - SIMPLE form, I believe it says annual pay.   So that's that.

Risk?  Failure to follow the terms of the plan, disallowed deductions I suppose.  Or thrown into an audit CAP.  Employee would have a claim for the unpaid contribution as well.

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An employer is required to match the elected employee deferral. IRC 408(p)((2)(A)(iii). The match , however, can not exceed the "applicable percentage"  which is 3% per IRC 408(p)(2)(C)(ii). The match is part of the requirements of a Qualified Salary Reduction Arrangement. A SIMPLE IRA may only receive deferrals thru a Qualified Salary Reduction Arrangement. Thus, improper match = one of the most common errors per the IRS website detailing the SIMPLE IRA.

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While it is not substantial authority, here is the relevant Q&A from the IRS' SIMPLE IRA Plan FAQs - Contributions

If an employee starts or stops salary reduction contributions in the middle of the year, can I make my 3% match based only on the compensation earned during the period they actually contributed? 

No, you must base your SIMPLE IRA plan employer matching contribution on the employee’s entire calendar-year compensation, regardless of when the employee starts or stops contributing during the year. The maximum matching contribution is always 3% of the employees’ compensation for the entire calendar year. Matching contributions may be made on a per-pay-period basis, or by the due date of the employer’s tax return (including extensions).

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I find that it always helps to preface these conversations with "ya know, the IRS calls them SIMPLE's but they're not so simple after all!"  Hardy har har.

😀

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