Misclassification correction

[SundanceKid]

We have discovered that, due to a payroll setup issue, employee deferrals to our SIMPLE IRA plan were calculated on an after-tax basis instead of a pre-tax basis from January to July 2025. Can we fix this by adjusting the remaining payrolls in 2025 to ensure each participant's total annual deferral matches their elected percentage of compensation for the remainder of the year? What would be the appropriate correction method?

[justanotheradmin]

https://www.irs.gov/retirement-plans/simple-ira-plan-fix-it-guide-you-used-the-wrong-compensation-definition-to-calculate-deferrals-and-contribution-to-participants-simple-iras

 

[justanotheradmin]

very similar to this error and correction - same correction and analysis principles under EPCRS https://www.irs.gov/retirement-plans/simple-ira-plan-fix-it-guide-you-excluded-an-eligible-employee-from-participating

 

[Nichol C]

A lot depends on whether the correct amounts were actually withheld and deposited to the SIMPLE IRA. The deferral percentage should be calculated on gross pay regardless of whether the election was pre-tax or Roth, so it may help to confirm, if you haven’t already, that the correct deferrals were withheld for each pay period.

If the correct amounts were withheld and deposited and the only issue was that payroll treated them as after-tax, then it’s really just a payroll clean-up. You’d just want to make sure the year-to-date wages and the W-2s show the right pre-tax treatment.

If the correct amounts weren’t withheld or didn’t make it into the SIMPLE IRA, then you’d follow the SIMPLE IRA Fix-It Guide option that best matches the situation, which @justanotheradmin shared above.