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25% penalty - corrected contributions?


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I was one of many employees who had their contributions corrected over an 8 year time span.  Our boss did not inform anyone of the SIMPLE IRA and had to correct 5 employees and make them right.  Now I'm in need of some of those funds (not Covid related) and was curious if there was any stipulation or exception for my scenario concerning the normal 25% early withdrawl penalty (vs. 10% after two years) due to my circumstances

Since I normally would've been "vested" or whatever the proper term would be as of 2015, do I fall into the 25% penalty regardless since my contributions were finally deposited in March of this year or do I potentially get an exception for my case?

Thanks!

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The usual situation required when the sponsor of a retirement plan has to correct their mistake, is to make affected individuals "whole".   That would include vesting schedules. 

The rub here though is the 25% penalty isn't a vesting schedule setup in the plan, it is an IRA excess tax for early withdrawal and it is based on when the funds were actually deposited in the IRA. 

Maybe someone will have a different take, but my advice would be to talk to a CPA or tax professional and see what they can tell you about options, if any, to get out of the 25% excess tax.  

 

 

 

 

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I was thinking along the same lines as you on both counts.  Making us "whole" with the program, perhaps including proper timelines of events etc.. but not sure the IRS will see it that way and provide the exception for the lost years of contributions and availability for early withdrawl and reduce the penalty from 25 to 10%.  

Thanks for the reply.

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Can't (at least without researching) add much to what Borsley said, but usually when you correct under EPCRS, the deposits are treated as if they had been timely made. This sounds like technically it could not be self-corrected, so maybe was covered in the VCP compliance statement, if your employer got one. Otherwise, at best unclear, probably.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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