Excess employer contributions to SIMPLE IRA since 2007

[gc@chimentowebb.com]

Since 2007 the company has matched the owner's deferrals in a SIMPLE IRA, violating the 3% compensation cap on matches. With earnings, the excess employer contributions cumulate to $300,000.

EPCRS states that the excess should be returned to the employer and should not be deducted. (The employee, the 100% shareholder, will then get a 1099-R for the $300,000 showing zero as taxable.) The employer, a sub-S, will report the $300,000 refund as income in 2022, the year of receipt, and it will be taxed to the 100% shareholder of the Sub-S as ordinary income in 2022.

All good, so far, but what does it mean in EPCRS that the employer shall take no deduction? Does that mean that corporate returns that claimed a deduction for the excess employer contributions since2007 should be amended? That's impossible. It seems too good to be true that the excess just gets returned to the Sub-S with taxes due in 2022 on the $300,000 refund and no other penalty or sanction.

Another possibility, when returns cannot be amended to disallow deductions for 15 years of excess contributions, may be to leave the excess employer contributions and associated earnings  in the SIMPLE IRA and to pay the 10% sanction in EPCRS. This is listed as an alternate correction, but may be the only available one in these circumstances.

I may ask for a no-names conference with IRS under the new procedures. Any experience with excess contributions to a SIMPLE going back this far? Any thoughts?

[Bird]

Um, I thought comp for SIMPLE matches was not limited.  He contributed more than 3%, or 3% on comp over the otherwise applicable limit?

[gc@chimentowebb.com]

Agreed. Comp is unlimited for SIMPLE matches, but if you match 100% of the deferral limit, your match will exceed 3% of compensation except for very high earners. In no event may a match exceed 3% of compensation, and that is the problem here. Anecdotally, it was a SUB-S company and the owner's accountant wanted to save Medicare taxes, so he made the compensation much less than the distributive share of earnings, and got his client into a big mess. 

[Bird]

Interesting although nothing surprises me any more.

Sorry but I have no experience with this.