Simple Employer Contributions

[jevd]

An employer makes an excess matching contribution to employee who has been terminated.

The contribution is subject to 10 % penalty for non-deductible contribution.

Is the employee subject to a 6% penalty on an excess IRA contribution and how is the contribution returned to the employer as all SIMPLE IRA contributions vest 100% to employee.

My opinion is that the employer reports the contribution as income to the employee and deals with the employee directly and the employee is the only one that can request the distribution from the plan.

Am I on the right track?

Thanks

[Appleby]

jevd

Check these posts.

http://www.benefitslink.com/boards/index.p...mple,and,excess

http://www.benefitslink.com/boards/index.p...mple,and,excess

http://www.benefitslink.com/boards/index.p...&f=2&t=8079&hl=

I hope these help

[jevd]

Thank You,

The discussion in the posts helped to understand the problem but there is apparently no clear answer. I haven't been able to get anything from IRS Pubs or rulings etc.

Thanks Again.

[Gary Lesser]

It is IMPORTANT to understand that the IRS no longer answers common questions--the No Help Service-- since there is no common law. However, upon the payment of a user fee ($2,100 I think) all your questions can be answered.

The excess should be reported in box 1 (only) of Form W-2 (see text of instructions on Form W-2). I no longer believe that the employee is subject to the 6 percent penalty. Under EPCRS there may be other approaches (see Rev Proc 2003-44 Section 6.10(5). All this being said, there is no clear answer. [The Rev Proc calls for the employer to "effectuate" distributions, which is difficult to comprehend because an employer has very no control over the trustee/custodian. And the transaction wd also see to be prohibited.] It seems that Congress may have forgotten to add the 6 percent penalty for an over contribution. The IRS has also stated (informally) the none of the contributiuons to any of the accounts are any good, i.e., no SIMPLE/bad SIMPLE (I call that a "complex"). But, even so, there is no guidance on that either.

When corrected after the due date, the amount that may be corrected (the normal IRA limit + SEP contributions) without taxation, is not increased on account of SIMPLE contributions. So, a failure to correct timely (before the due date) may subject "excess" amounts later distributed to double taxation.

It wd appear, too, that the 10 percent penalty is avoided by placing the excess on the employees W-2 (box 1). But again, no guidance.