Termination of SIMPLE IRA

[Guest Christine]

Employer is experiencing unexpected financial difficulties and can no longer make any matching contributions to the SIMPLE IRA. How does an employer terminate a SIMPLE IRA without triggering the 25% penalty? Can the employer pass a board resolution freezing the plan, wait until each participant was in the plan for two years, then distribute the assets? Can termination/freezing asssets be done mid-year?

[Guest Paul McDonald]

I believe the IRS would say that the employer is on the hook until the end of the calendar year to fulfill their original declaration to make matching contributions. The matching contributions are not due until the employer's tax filing deadline (including extensions) so the employer does not have to make them currently along with the deposit of the deferrals. If the employer cannot fulfill their obligations the whole program falls apart.

Is the employer allowed to discontinue the salary deferral elections made by employees unilaterally? Not sure. If all the employees elect to discontinue making salary deferrals, the employers obligation to make matching contributions would cease. Is the employer at risk in telling all the employees to elect to discontinue making deferrals otherwise the business will suffer?

The 25% penalty is on the part of the SIMPLE IRA holder and not the employer. If the program stops, the SIMPLE IRA is dormant and as long as nothing is distributed within the first 2 years, nothing happens. The participant is supposed to be the owner of the SIMPLE IRA and not the employer. The employer loses control of the assets once deposited into the participants SIMPLE IRA. The employer does not control distributions. Is this SIMPLE IRA plan set up correctly in the first place?

[Guest Parker]

A similar question came up at work. The precise question is: What are the ramifications on an employer and its employees if the employer is unable to make its matching (or nonelective) contribution due to financial difficulties? This assumes that employees had made salary deferrals during the year, and that an employer contribution is required to be made. Is there an IRS penalty on the employer if it doesn’t make the contribution? Will the DOL get involved, and what are its remedies? What happens if the plan "falls apart," as Paul mentioned?

Are there any tax consequences on the employees? It seems unlikely as long as nothing is distributed unless, for some reason, the SIMPLE IRA ends up getting treated as a regular IRA, and the salary deferrals would be treated as an excess IRA contribution (to the extent they exceed $2,000).

I am looking, but have not found any guidance thus far.