Too much contributed to a SIMPLE IRA

[R. Butler]

Plan sponsor contributes too much employer money for 2 participants. I went to the SIMPLE Fix It guide on the IRS website. The suggested correction is to distribute the excess amount & report it on 1099-R issued to the participant indicating 0 as a taxable amount? A couple of questions:

1. Any good argument to have the money returned to the employer rather than the participant?

2. If the money is distributed to the participant, why is the taxable amount 0?

Thanks for any guidance.

[Gary Lesser]

The problem was that too much went to the participant. It would not be much of a fix to turn around and give the excess funds to the employee. For it to be fixed, the amount (adjusted for earnings) must be distributed to the employer. No deduction can be claimed for the excexx contribution. Other solutions may be possible. A Streamlined Application Procedure is available under Revenue Procedure 2008-50 for reliance on the fix. If the problem is egregious, special considerations may apply. The excess amounts may also be subject to the 10 percent nondeductible contribution penalty unless timely corrected.

If it is a current years contribution, the amount could arguably be included in box 1 of Form W-2 and the excess (adjusted for earning) removed as a correcting distribution by the participant. It may be necessary to explain to the IRS why the contribution portion of the amounts removed (generally treated as a taxable distribution from the SIMPLE IRA and reported on Form 1099-R by the trustee or custodian) are not taxable twice. Unless the correction amount is actually removed by the participant, this method will not result in a fix.

Hope this helps.