Failure to make matching contribution

[k man]

What happens if a plan sponsor does not make the required match in a SIMPLE 401(k) or IRA.

[Gary Lesser]

In the absence of well-established guidance, the position of the IRS regarding excess contributions to a SIMPLE 401(k) plan is, at best, unclear. Several possibilities exist, some of which offer solutions:

1. The plan becomes a traditional 401(k) plan and is taken out of the realm of a SIMPLE 401(k). In the authors' opinion, this is an unlikely choice because of the information provided to the participant by the plan regarding the manner in which the plan would operate for that plan year.

2. The plan becomes a “bad” SIMPLE plan or a plan with a “bad” contribution allocation. Correction should be made under the EPCRS.

3. It may be possible to correct the excess contribution if plan contributions are the result of a mistake of fact. [ERISA § 403©(2)(A)] In the authors' opinion, this option is least likely; furthermore, the IRS has not included excess SIMPLE contributions as a clear mistake of fact.

4. It may be possible to correct the excess contribution (in accordance with plan provisions) if plan contributions are conditioned on their deductibility and the deduction for the contributions is subsequently denied. [ERISA §§ 403©(2)©, 4972©(2)]

In May 1999 the IRS informally agreed with propositions 2 and 4 above. [General Information Letter issued to Gary S. Lesser, May 18, 1999; see also Rev Rul 91-4, 1991-1 CB 57.

Obviously, a practitioner should proceed with caution when dealing with excess contributions to a 401(k) SIMPLE plan until further guidance is provided by the IRS.