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SIMPLE IRA gone "bad"

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Scenario: SIMPLE IRA went "bad" (disqualified) several years ago due to failure to offer the SIMPLE to the employees of a related company.

Cost to make corrective contributions under EPCableRS for the employees of the related company would be exorbitantly expensive so the only viable option is to treat the contributions as not having been made to a "qualified" SIMPLE IRA.

There's no official guidance on how to handle this so our thought is:

1. For the year's still open under the statute of limitations have the employer amend the W-2s to add the deferrals and the match to Box 1 wages and the match to Box 3&5 SS and Medicare wages. There should be no income tax impact to the employer but will owe SS & Medicare tax on the match amounts (employer will also pay employee share)..

2. At the participant level treat additional income amounts as contributions to a traditional IRA. Depending on the employees situation the contributions may be deductible, non-deductible or excess. Employer will cover the costs associated with amending the employees individual tax returns and paying additional taxes but due to the small amounts involved it's believed that the vast majority will be deductible so the net tax impact to the employees will be negligible.

Anything we're missing?





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  • 2 weeks later...

Other than the aspect of going back to amend prior years' tax returns, it's basically the same as unwinding the SIMPLE contributions in a calendar year where a qualified plan is established.  I think you have that covered.

I've run across numerous SEPs and SIMPLEs over the years that do not meet coverage requirements.  Never have I had an employer want to go back and correct prior years.  Has this ever been caught on audit?  Not that I've ever seen.  I know we can't advise this way but the advisor or accountant sitting in the meeting usually asks the question.  Then they make their choice.  

I carry stuff uphill for others who get all the glory.

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