Gary Lesser

See topic "egregious SIMPLE IRA violations by employer" on this board-- Simples can be very unforgiving. The only possibility I have heard of is for client to "sleep with one eye open." Arguably, there is no simple; all contributions for those 2 years are excess contributions and subject to the tax on nondeductible contributions. There are no rules regarding the excess amounts in the IRAs. Under the EPCRS, the service might allow amounts that are in plan to remain, but charge a 10% penalty, plus sanctions. I may have more information (informal advice) in a few weeks on how lenient--if at all--the DOL would be in such a situation. Are you absolutely sure the owner elected to have amounts deferred into the plan? Any chance owner opted out? If there was an opt out, it is unclear if the 50% participation rate test would be satisfied for applicable years based on your facts.] Hope this helps.

The SEP document must be a prototype if the employer is currently maintaining a qualified plan. There can be no exclusion of a controlled group member under a SEP arrangement. All employees (including owners) must participate in the SEP.

I forgot to mention that the employer must correct the late/missing deferral issues before the DOL/EBSA to avoid criminal penalties. Other defects can (and should) be fixed before the IRS. Self-correction does not appear to be an option.

Nice summary. Any complaint to the IRS or EBSA would remain anonymous; although he employer will probably suspect your wife is the cause of their many problems. I would be inclined to contact both agencies. The employer appears to have violated its fiduciary responsibility (think prohibited transactions,15% tax, and penalties) and this also has civil and criminal aspects attached to it. Each years prohibited transaction (generally the lost interest amount) is stacked onto the following year. There may also be state law issues that need to be explored before any statute of limitations would apply. SIMPLEs can be very unforgiving. The IRS is likely to impose sanctions; and I expect that they would be very costly (even more so, if it were "discovered upon audit). Also, missing deferrals and matching contributions would have to be restored to the plan along with earnings. There would also be interest on the underpayment of taxes, late filing and late payment penalties. There is also a penalty for making nondeductible contributions. Preparing the spreadsheets to calculate the various components can be costly, not to mention the cost of preparing an application to correct the deficiencies. See Section 6.11 of the linked revenue procedure and search for words "egregious" and "sanctions." EPCRS - Rev. Proc. 2016-51 I doubt there would be any adverse tax consequences to your wife, other than paying taxes on any distributions from the SIMPLE account. The interest would be computed on each and every late/missed payment until your wife is made whole (see section 6.11 mentioned above.). State legal action aside, the correction must be deposited into the plan account. Hope this helps (and your wife and the employer get what's coming to them).

The model should be okay in your case.* For years, it was common practice for an employer that maintained an "elective only" 403(b) plan to make employer nonelecive contributions ino a SEP arrangement. In that manner, the 403(b) arrangement avoided ERISA status. Those rules have changed some, but that is unimportant.Employers used prototype SEP documents, as the coordination of 415 limitations was covered under prototype plan language; and under the 415 regulations SEPs were disqualified last!. The issue, is and has always only been Code Section 415. Unlike prototypes, the IRS model SEP documents do not have any language coordinating 415 with any other plans. However, you said the 403(b) was a "pre-existing" plan. Therefore, the model can be used since the any "other qualified retirement plan" is not being currently maintained. The restriction in the model Form 5305-SEP states: " 1. Currently maintain any other qualified retirement plan." {Emphasis added.} Although a prototype can be adopted to address the document issues (retroactively to beginning of year if return due date not passed), the real issue is whether 415 has been exceeded and how the Service will allow you to fix it; the document itself is an unimportant side issue. FWIW, a qualified plan is defined in Code Section 401(a), and a 403(b) is not a qualified plan. That being said, for some purposes that term includes other plan types. Those purposes include rules under Code Sections 72(p)--yes, 219-yes, 415-yes, see 403(b)(1), 4975 and 4980--no. HOWEVER, the model form does not use the word "qualified plan" it uses the phrase "qualified retirement plan," and that phrase is used in several code section headings and in text, but is not defined in the Code. The intent under the model plan, was for the reasons discussed above, was to treat a 403(b) plan as an "other qualified retirement plan." Hope this helps. *[Carol~~Just finished preparing spreadsheets for a client attorney with over 500 calculations for his EPCRS or DOL filing; so, EPCRS is my least favorite topic today. The fees have far exceeded to restoration amount; there should be a better way. But since you resurrected an old message, and reached out, I have responded.]

Yes, VCP, but not SCP. An egregious error (which this is) can only be fixed with Service approval (submission of application under EPCRS required). There are competing approaches (disqualification under Code; or fix as excess* or making restoration under the EPCRS) that could be used (considered) depending upon how long this has been going on for. I do not think the Service would entertain the idea of a simple distribution to fix this (see EPCRS 6.11) Absent some sort of scrivener's error (doubtful), for earlier years I can not see using any age or service requirement. All employees are eligible! The Service could also impose additional fees because of the egregious error. See EPCRS Sections 4.11 and 12.06. A reallocation is not a sanctioned method; and would only make matters worse. SEPs are very unforgiving. Hope this helps.

If tax due date has not passed, the SEP could be amended into a prototype effective as of the first day of plan year (e.g., January 1, 2015). The P.S. approach, might work, but could cause discrimination or a bad allocation for the prior year (2014), not mention an excess contribution. Note that SEP contributions are reported by trustee or custodian for the year "in which" they are made. The year "for which" they are made is not indicated.

KimBoyd, welcom to the Boards. 1. The two-year rule for purposes of determining whether a distribution from a Simple IRA is subject to the 25% tax begins on the date the first elective contribution was made into that Simple IRA Account. Subsequent deposits are irrelevant. IRC 72(t)(6). In your case, no problems on this score, but.... 2. Terminating the SIMPLE IRA during 2016 may be problematical (if that was intended, not clear from your inquiry above). If the Simple plan was not properly terminated for 2016, it can not terminate until 2017 and only if notice is given to employees before November 2, 2016 (see example). Special rules apply to acquisitions and other similar transactions. See Code Section 408(p)(10) for the Simple and 410(b)(6)(Cee) for the 401(k). Thus, the exclusive plan requirement under 408(p)(2)(D) is NOT treated as violated. And the Simple plan needs to continue (at least) until year end (2015 or 2016, depending upon the date notice was given). In other words, including the same employees in both plans in 2016 may not be a very good idea unless the Simple plan was timely terminated (e.g., on or before November 2, 2015) for 2016. Example: Acme Company decided on November 18, 2015, to terminate its SIMPLE IRA plan as soon as possible. The earliest effective date for the termination is January 1, 2017. Acme must notify its employees before November 2, 2016, that it won’t sponsor a SIMPLE IRA plan for 2017. Hope this helps.

Belgarath, I see your point. Since current addresses are known, establishing SIMPLE IRAs should be satisfactory. Banks are more likely to establish an account for a recalcitrant employee. It might be helpful to provide the financial institution with a copy of IRS Notice 98-4. Q&A G-4 of that Notice regarding Administrative Requirements reads as follows:

Welcome to BL. Since no one replied, I'll take a stab! Since employer is being examined, I would just wait. The employer will probable be hit hard and stiff sanctions imposed upon audit. Some of the excesses may have been caused by the employer making nonelective contributions. To that extent, the excess may is to be returned to the employer (in this case you get 1099 showing $0 taxable). Technically, the amount above the 25% (of taxable compensation) would have been included on Form W-2 (box 1) and corrected as an excess in earlier years. If not timely corrected, the excess would be subject to a 6% cumulative excise tax until corrected--although it may be abated for good cause; like you didn't know of excess. Under the EPCRS, if the amount is returned to you (adjusted for earnings), it may will be reported as taxable in year received (better than amending prior returns). If the excess amounts were included in income in earlier years, you would have a good argument (but may have to convince service that amount, other than gain, was already taxed). If the IRS allows the excess to remain (possible, but unlikely, since it is a violation of code section 415), you will be home free. The alternative (self-fixing), would be to remove the excess after the return due date (without adjustment for earnings). The amount, other than earnings, isn't taxable (provided the amounts were previously included in income). Colpash, has this been resolved? If so, what happened?

Generally speaking, the SEP plan went bad after 2002 (see Section 4 of Rev. Proc. 2002-10, below)-- That being said, the EPCRS can be used to fix the problem, it should only cost $250 (application fee) and 10% of the plan assets (retention fee). It can not be fixed without service approval. There may be several "closed" years that need to be considered (see a Pension lawyer). The 10% nondeductible penalty tax would apply for all years unless Form 5330 has been filed or the excise tax waived by the Service under the EPCRS. Hope this helps.

Yes, the employer may reestablish a SIMPLE-IRA plan, but no sooner than the calendar year following the termination of the qualified plan. [see IRC 408(p)(2)(D), Arrangement May Be Only Plan Of Employer]

Establishing an account to receive the contributions is not necessary under the EPCRS. The EPCRS (Revenue Procedure 2013-12) does contain the following guidance-- "(d) Locating lost participants. (i) Reasonable actions must be taken to find all current and former participants and beneficiaries to whom additional benefits are due, but who have not been located after a mailing to the last known address. In general, such actions include, but are not limited to, a mailing to the individual’s last known address using certified mail, and, if that is unsuccessful, an additional search method, such as the use of the Social Security letter forwarding program, a commercial locator service, a credit reporting agency, or Internet search tools. Depending on the facts and circumstances, the use of more than one of these additional search methods may be appropriate. A plan will not be considered to have failed to correct a failure due to the inability to locate an individual if reasonable actions to locate the individual have been undertaken in accordance with this paragraph; provided that, if the individual is later located, the additional benefits are provided to the individual at that time." "(ii) The IRS Letter Forwarding Program is no longer available....." {EMPHASIS ADDED.} Hope this helps.

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.

Hi Mike. What took you so long, I posted my reply (above) 15 years ago. The "comments" below the article you cite disagree with the position taken in that article; and strongly suggest that the adoption of the 401(k) plan would invalidate the SIMPLE. The SIMPLE would become a "complex." The exclusive plan requirement is an "administrative requirement." In other cases (general rule), a termination notification would generally be required to be given before November 2 to terminate the plan for the following year (no mid-year termination). Code Section 4973 does not provide for a 6% tax on such contributions (call them over contributions or excesses) as it does for excesses to traditional IRAs. The 10% tax on nondeductible employer contribution would apply, but is equal to the 10% retention fee under the EPCRS. Since there is no clear right to remove excess simple IRA contributions, the distributions will likely be taxable when distributed (and possible twice, if the amounts were not excluded by the employer). On commentator did point out that Rev. Proc. 2013-12, § 12.07 might cause an additional fee of a negotiated percentage of the Maximum Payment Amount in the event of an "intentional failure." The term intentional failure is not defined in the EPCRS. That section reads: None of this relate to a SEP.

If the FY is used as the PY, then performing service for eligibity is determined on a PY basis. Assuming this was a new plan, then no, since the employee was not employed at any time during the plan year. OTOH, if an existing plan, then the employee wd appear eligible for a contrtribution for the (prior) 2013-2014 plan year.

Assuming a prototype plan is in place before the plan is terminated a 401(k) plan cd be adopted. Contributions to the SEP are treated as contributions to a profit-sharing plan for purposes of the deduction limits under Code Section 404. See 404(h)(3). I wouldn’t call it a short plan year; but rather a termination or discontinuance of the SEP. Treating a model as defective and participants treating contributions as excesses could get ugly. A decent consultant could handle the calculations under 404 and 415. Hope this helps.

It wd appear that both businesses are controlled and all employees therefore treated as if employed by a single employer for 2013. Compensation from both entities must likely be considered for the plan. All eligible employees must participate. Hope this helps.

Seems like you have a W-2 problem. Be certain that whoever completed the W-2 form completed the other boxes correctly and didn't net out amounts in box 1. This oversight, alone, wd not affect the SIMPLE.

SEP contributions should be made according to the SEP agreement (not the SARSEP agreement). It should be noted that compensation for top-heavy purposes must use unreduced compensation regardless of which document is being used. Consider using a prototype SEP/SARSEP plan document that generally gives the user an option. See, too, Publication 560, page 4, "Compensation."

For purposes of being eligible to use Form 5305, the term qualified retirement plan includes an qualified annuity plan under Code Section 403(a).

Any excess contributed to the SEP-IRA must removed or slowly used up. It can not be recharacterized into anything. Hope this helps.

I do not believe the IR-Annuity and the IR-Account can be aggregated based on the reasoning in the following regulations that treats an annuity contract purchased inside of an IRA as separate and distict for RMD purposes once annuitized. It would appear that there are two separate plans here as well. Thus, IMO, the two IRAs can not be aggregated for purposes of calculating the RMD or be used to offset against one another RMD amounts; there is no excess from the annuity regardless of how it is annuitized. Hope this helps. §1.401(a)(9)-6, Q&A 12 -- zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz §1.401(a)(9)-8, Q&A 2(a)(3) -- ).

As I said, it is not an area that has much guidance. Borrowing ideas from the QP rules may be wrong (read: "may not apply to SEPs"), but should give a reasonable person an idea of where the IRS's head is. Having two nonelective SEPs could cause numerous problems (less so, but still problematical, if they are identical documents). If they are not identical (provisions, terms, definitions, option), then which one applies to an employee covered by both documents. Here's where the pro-rata rule could really go awry (and then there would be discrimination). Why would an employer have different documents when all employees are treated as if employed by a single employer? I do not believe that the dicrimination issue (if it even exists) can be avoided by adopting a new document each year. The IRS could argue that, in operation, the plan or plans are discriminatory. OTOH, your (Craig) research will add to what we still know very little about. It is surprising that no PLRs have ever been requested on the rolling eligibility issue. The phrase "protected benefit in the SEP environment" is just awesome, perhaps it will catch on!! Different eligibility is discussed in ancient Rev. Ruls.70-75, 70-77, and 73-382

Agreed. Also, the son (an "employee") is counted for purposes of the 50% deferral test.