Simple IRA issues

[eilano]

C corp client's fiscal year/plan year runs from 10/1/02 - 9/30/03. Employer sponsors a Simple IRA in which the employee and employer contributions were funded for the plan year for his employees. However, the owner's contributions were not withheld for the current plan year but an employer match of $7,713 was funded for himself during the plan year. Since his employee contributions were not withheld, what can be done to correct this? Also, what should be done about the employer match for the owner since it is over $6,000 (3% of $200k) and no employee contributions were made for him during the plan year?

[Gary Lesser]

1. Too bad the owner chose not to participate or make a nonelective contribution for year. Because elective contributions were not made by the owner, the owner did not participate. Thus, aside from a bad plan year (if you really meant a fiscal plan year), the only issue is the excess matching contribution made to one account (that the owner controls). The match is only allowable to the extent of the elective; in this case, nothing--so the match is an excess.

Do not deduct the excess on the business tax return for the FY ending 9/30/04 (see below). Report excess in box 1 of owner's W-2. On employer letterhead prepare notification to employee to assist in getting the money out of the Simple-IRA without the 25 percent penalty, if applicable. Owner should request that excess amount (including gain) be distributed (to correct; otherwise excess amount taxed twice). IMO, the 6 percent penalty would not apply if left in the SIMPLE IRA.

OTOH, if the plan is a CY plan, then it may be possible for the 2003 elective contribution to be made timely. In such case, the excess is only $1,713 (see above)

2. The SIMPLE IRA plan year is required to be the calendar year under 408(p)(6)©. If 9/30 was used as the end of the plan year, then there may be several other problems. In that case, see the Voluntary Correction Programs available under Revenue Procedure 2003-44.

Allowable contributions made for the 2003 SIMPLE CY are deductible on the business's tax return that includes 12/31/03, to wit, the 9/30/04 return. [iRC 404(m)]