This is a good one!

[betheeg]

We have an accounting client that has recently asked me to look at their options for retirement plans. They told me they had a Simple Ira in place. After reviewing, this is the list of problems they have:

1. There plan document is a SEP plan document.

2. They have been remitting employee deferrals "when they get around to it" - maybe once a quarter...randomly at best.

3. They have excluded a part time employee that should have been included for 3 or 4 years.

4. They have been withholding employee deferrals AFTER TAX - yes - I said after tax!!!!!

5. The match for 1 employee has been done consistently incorrectly.

I know this "plan" is screaming for the VCP - I just have never had to do that before. Can someone give me ideas on how to file - or if I can with a Simple Ira - and what they would be looking at for maximum penalties??? what is the basic process for going throught the VCP?

thanks for any help-

Beth

[Nate X]

You really should get an ERISA attorney on such issues.

With any correction, the place to start is to figure out how to put the plan back into the same position as if the error never occurred. There are several government programs to guide you though the way to make such corrections.

Generally in order to take advantage of any correction program, you mast make the plan whole. That is to say, correct all plan violations. Issue #4 obviously causes the biggest problem. Here is my suggestion:

A. Distribute all after-tax contributions from the plan including earnings. This may mean all employee contributions made to the plan are distributed. The logic here is that participants are ineligible to make after-tax contributions to the plan, so the correction is to return the contributions plus earnings from the plan to participants.

B. Have the employer make a QNEC to the plan equal to the amount participant’s elected to defer plus lost earnings for all plan years. The logic here is that participants elected to defer money on a pre-tax basis but the employer never withheld those deferrals. The correction would be similar to the EPCRS correction for issue #3.

C. File this correction and Issues #3&5 under EPCRS. The IRS recently revamped the program. It’s good reading and will answer most of your questions. The latest publication can be found at:

http://www.irs.gov/pub/irs-drop/rp-06-27.pdf

D. Issue #2 could be corrected under VFCP for any pre-tax contributions that were not submitted timely to the plan. After-Tax contributions would be corrected using A & B.

http://www.dol.gov/ebsa/newsroom/0302afact_sheet.html

....and I'm sure others will have something to say about my opinion.

[MARYMM]

You really should get an ERISA attorney on such issues.

. Issue #4 obviously causes the biggest problem. Here is my suggestion:

A. Distribute all after-tax contributions from the plan including earnings. This may mean all employee contributions made to the plan are distributed. The logic here is that participants are ineligible to make after-tax contributions to the plan, so the correction is to return the contributions plus earnings from the plan to participants.

....and I'm sure others will have something to say about my opinion.

Shouldn't they keep the deferrals in the Plan and issue W2c's to the affected ee's ? The ee's had a higher income tax liability than they should have had and should be given the opportunity to file amended returns, shouldn't they ?

[Bird]

Just isolating on the contributions that were made after-tax, probably the correct thing to do is return them, as suggested by Nate X, since the plan didn't permit employee contributions at all. But, one of the problems you'll run into is that the investment company holding the money almost surely has the accounts set up as SEP-IRA accounts, which means that they're under participant control, and also means that they will be disinclined to make any distributions without issuing a 1099-R. So the practical thing to do might be to try to adjust the W-2s...but if you're talking 3-4 years...sheesh.

(I am making an assumption that these are IRA accounts; if that's wrong, then the above is irrelevant at best.)

I might be inclined to try to figure out a way to make ALL deposits employer SEP contributions, and "true-up" as needed to make the numbers work out. I don't know if that's practical or not.

Some things are unfixable. This might be one.

[Guest mjb]

Before looking at VCP consider the following: Regardless of what plan the er thought it adopted, the contributions were made to a SEP-IRA which is not a SIMPLE IRA. Employee can contribute to an IRA used to fund a SEP. EE contributions are considered excess contributions subject to the 6% penalty tax only to the extent they exceed max contributions to an IRA, e.g. $4,000. (Any employee can make after tax IRA contributions to an IRA used for SEP contributions regardless of AGI.) For part time employee er can make back contributions for open tax years (03,04,05). Since they cant have a match in a SEP they need to make sure that the SEP contribution formula did not discriminate in favor of HCEs for years prior to 05 and fix it. O5 can be fixed by adjusting plan contributions if the er has not filed its tax return. ( I am assuming the match referred to was the AT employee $ to IRA).