Miscalculated Elibility in SIMPLE plan

[Guest kdp]

A former employee was eligible to participate in a SIMPLE plan for the years 2003,2004 and while employed for part of 2005. The employee was never notified of their eligiblity but it is reasonably certain the employee would have contributed 3% and the employer would have had to match.

The employer would like to make the former employee whole, but is also afraid the former employee, who is NOT aware of this issue, would want to cause trouble for the sake of causing trouble. It was suggested that since the dollar amount is not an issue with the employer, that the employer calculate lost earnings based upon the investment that generated the highest return each year as if the money was contributed at the beginning of each year. (It doesn't seem apparent that there would be a way to calculate a higher return.)

The ultimate questions are these:

1. Taking the above approach, what exposure does the employer have if the employee wants to cause troubele for the sake of causing trouble?

2. What can the employer do to make the correction while insulating themslves from a potentially troublesome former employee that is not aware of the oversight?

[Gary Lesser]

The failure to notify affected employees could be corrected with a $50 per day penalty payment. I believe the penalty starts on the day the 60-day Notice sd have been provided.

I would see Rev Proc 2003-44 regarding interest rates and the voluntary correction methods that are offered "without" service approval. The DOL/EBSA also has an online calculator that may provide "reasonable" interest rates.

The employee would have little to complain about. Assuming there are no other failures, the plan goes on. The amounts paid would be deductible on the next tax return of the business. The affected employee should be given their notice (and an apology), along with some amended W-2s showing active participation. The elective portion would have to be reflected on the appropriate years W-2 (and i'm not sure which year that is at the moment, but probably 2005, with the appropriate code). See Form W-2 reporting instructions. The 2005 version is available. A letter of instruction (contribution year /amount /interest ) may be helpful when remitting the amount to the trustee/custodian, especially if the corrective distributions exceed the general $10,000 limit for any one year. If the employee made deductible traditional IRA contributions thre may be other issues. It's all I can think of at the moment; hope this helps.

[Guest johnpetrancosta]

Gary,

Isn't there a correction program the employer could enter that would avoid the $50 a day penalty for notice failure?

[Gary Lesser]

Under the EPCRS the operational failure gets fixed, but the "the excise taxes and additional taxes"..."are not waived merely because the underlying failure has been corrected or because the taxes resulted from the correction." See Rev Proc 2003-44, Sec 6.09. That being said, there is no harm in asking for such relief since it is a Code penalty. I do not believe that the $50 penalty under Section 6663 is an excise tax (??), so you may have a shot. You might want to utilize the anonymous (Mary Doe) submission procedures. In all likelyhood, the EPCRS examiner or approval reply will not mention the penalty tax (so I'd get any waiver in as part of the correction being approved).

Most employers wouldn't fix the problem, even fewer would pay the penalty tax.