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SIMPLE IRA w/Match, failed to withhold for new employees


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advisor I work with let me know that he has a client that had some employees enroll in 2021, but he never withheld anything, and did not deposit anything for these employees. Can they correct under VCP? how should they handle the fact nothing was ever withheld? I'm having some difficulty trying to figure out the best course of action.

if the SIMPLE is being treated as a qualified plan would be, then I think that this applies:

P test. .05 Exclusion of an eligible employee from all contributions or accruals under the plan for one or more plan years. (1) Improperly excluded employees: employer provided contributions or benefits. For plans with employer provided contributions or benefits (which are neither elective deferrals under a qualified cash or deferred arrangement under § 401(k) nor matching or after-tax employee contributions that are subject to § 401(m)), the permitted correction method is to make a contribution to the plan on behalf of the employees excluded from a defined contribution plan or to provide benefit accruals for the employees excluded from a defined benefit plan. (2) Improperly excluded employees: contributions subject to § 401(k) or 401(m). (a) For plans providing benefits subject to § 401(k) or 401(m), the corrective contribution for an improperly excluded employee is described in the following paragraphs of this section .05(2). (See Appendix B, Examples 3 through 12.) (b) If the employee was not provided the opportunity to elect and make elective deferrals (other than designated Roth contributions) to a § 401(k) plan that does not satisfy § 401(k)(3) by applying the safe harbor contribution requirements of § 401(k)(12) or 401(k)(13), the employer must make a QNEC to the plan on behalf of the employee that replaces the “missed deferral opportunity.” The missed deferral opportunity is equal to 50 percent of the employee’s “missed deferral.” The missed deferral is determined by multiplying the actual deferral percentage for the year of exclusion (whether or not the plan is using current or prior year testing) for the employee's group in the plan (either highly compensated or nonhighly compensated) by the employee’s compensation for that year. The employee’s missed deferral amount is reduced further to the extent necessary to ensure that the missed deferral does not exceed applicable plan limits, including the annual deferral limit under § 402(g) for the calendar year in which the failure occurred. Under this correction method, a plan may not be treated as two separate plans, one covering otherwise excludable employees and the other covering all other employees (as permitted in §1.410(b)-6(b)(3)) in order to reduce the applicable ADP, the corresponding missed deferral, and the required QNEC. Likewise, restructuring the plan into component plans is not permitted in order to reduce the applicable ADP, the corresponding missed deferral, and the required QNEC. The QNEC required for the employee for the missed deferral opportunity for the year of exclusion is adjusted for Earnings to the date the corrective QNEC is made on behalf of the affected employee. (c) If the employee should have been eligible for but did not receive an allocation of employer matching contributions under a non-safe harbor plan because he or she was not given the opportunity to make elective deferrals, the employer must make a Page 84 of 140 corrective employer nonelective contribution on behalf of the affected employee. The corrective employer nonelective contribution is equal to the matching contribution the employee would have received had the employee made a deferral equal to the missed deferral determined under section .05(2)(b). The corrective employer nonelective contribution must be adjusted for Earnings to the date the corrective contribution is made on behalf of the affected employee.

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Luke, yes, they signed up asked to defer, and the ER failed to withhold or transmit a payment. As it turns out, the IRS has really specific guidance that I found:

 

If you excluded an eligible employee, you must make up for the employee’s “missed deferral opportunity” by making a contribution of 1.5% of compensation for the period of the employee’s exclusion, plus earnings (calculated from the date that the elective deferrals should have been made through the date of correction). The “missed deferral opportunity” is the economic loss to the employee from not having a portion of compensation deferred on a pretax basis to a retirement account in which the amounts deferred can accumulate tax-free. Since the employee didn’t have a chance to make an election, IRS safe harbor correction methods assume that the employee would’ve elected to defer 3% of compensation. The required corrective contribution to replace the missed deferral opportunity is 50% of the missed deferral, or 1.5% of compensation.

If, under the plan, the employer contribution is a 3% match, then the corrective contribution should include a matching contribution of 3% of compensation plus earnings (calculated from the date that you should have made the required contributions through the date of correction). If the improperly excluded employee made the 3% of compensation elective deferral, as assumed in the prior paragraph, then the employee would’ve received a matching contribution equal to 3% of compensation. (Note: This contribution is in addition to the corrective contribution you must make to replace the “missed deferral opportunity.”)

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