Company has 403b plan but participant opens simple IRA

[jmartin]

I have a 403b plan whose assets are invested with an Insurance Company. Have a participant who has been in the plan finally decide to start participating. He contributed $900 and the company matched $900. The issue that I just found out was that the money was not deposited with the Insurance Property.  Instead the participant opened up a Simple IRA, which the company deposited the contributions into.  This opens up a host of issues but wanted to get some ideas on how to best move forward.

[Madison71]

A participant cannot open up SIMPLE IRA without plan administrator/sponsor approval?  I thought the plan administrator needed to not only establish the plan with the IRS Form 5304 or equivalent, but also sign off on the individual participant account forms.  I don't believe you have a valid plan unless these occurred. 

[Larry Starr]

As noted, a participant CANNOT open up a SIMPLE IRA unless the employer has ADOPTED a SIMPLE IRA PLAN (IRS 5304 or 5305 SIMPLE).

And a SIMPLE cannot be established if another plan exists (which the 403(b) is).

So, no contribution can be legitimately made to this IRA (no matter how it got set up) to meet the 403(b) requirements.  

The error is only the company's; it put money into the wrong account.  It needed to put the withheld employee deferral into the 403(b) and it did not.  It still needs to do that and make the match to the 403(b).  The employee is entitled to that money which he deferred under the terms of the 403(b) and it is not the employee who screwed up (I assume the employer told him to set u the IRA, but that really doesn't matter anyway).  

One  possible fix is to re characterize the $1800 as W-2 compensation to the employee and the employee to treat it as an $1800 contribution to an IRA subject to the normal IRA rules. Yes, it ends  up costing the employer an EXTRA $1800 (plus SS taxes) to fix it, but that's the cost of being an idiot and not seeking professional advice.

Larry.

[Luke Bailey]

Is the "participant" a w-2 employee of the 501(c)(3) or school that sponsors the 403(b), or a 1099 independent contractor with respect to the 501(c)(3) or school?