Employer data entry error caused excess employee elective deferrals in SIMPLE IRA — custodian says funds cannot be removed

Looking for guidance on a specific situation. We are a small employer with a SIMPLE IRA plan. Due to a payroll data entry error on our end, the wrong employee elective deferral amount was entered in our payroll system (Gusto) for one employee over 3 pay periods within the same quarter. The excess is well under the annual IRS contribution limit.

We contacted our CPA who also serves as our SIMPLE IRA custodian. They reached out to their back-end clearing firm (Apex Clearing) who is saying the funds cannot be removed and there is no corrective process available through their platform.

Our CPA advised against an early withdrawal with the employer absorbing the 10% penalty. The current proposed solution is issuing the employee a reimbursement check for the full amount, with the equivalent amount remaining in the SIMPLE IRA. The CPA is treating this essentially as a loan — the employee receives the check now and the equivalent amount is recouped via their ongoing $79 biweekly paycheck deduction going forward, rather than that amount going to their SIMPLE IRA contributions.

My questions:

Is there an IRS correction process (EPCRS/SCP) that applies specifically to excess employee elective deferrals caused by employer data entry error?

Is Apex Clearing's position that funds cannot be removed accurate?

Is the reimbursement check/loan structure compliant and is there a cleaner solution?

Thank you in advance.

Since the excess deferral is due to a payroll error, use EPCRS 6.06(2) to refund the excess and related earnings to the participant.  The refund is reported on a 1099R with code E (no 10% penalty will apply).

The suggestions by Apex and by the CPA are fraught with all sorts of compliance issues.

Do I have this right?

Deferrals were withheld from pay that shouldn't have been, and were sent in to that employee's SIMPLE IRA. All affected paydates are in calendar year 2026. 

Some questions:

Is the employee okay with those deferrals as is, even though they are larger than intended? 

Would they sign a retroactive deferral election form for the employer to keep in their files as part of a self correction? And then they can sign a deferral election now changing prospective deferral amounts downward or to zero if they don't want to defer as much for the remainder of the year. 

Is the employer going to correct those paydates to show only the correct deferral amounts withheld? 

If so - then there is an advanced deposit of employer money in the person's SIMPLE IRA. It isn't pre-tax deferrals that would be distributed with a 1099-R to the employee as a standard correction. 

If there is an advanced/unexpected/misdirected deposit of employer dollars - can it stay in there? EPCRS corrections generally favor amounts staying in the the account if the amounts aren't large, the person is a NHCE and it does not take away from other participants. 

Though EPCRS was broadened to include corrections under SIMPLE IRAs and this would technically be an operational failure, the tricky part is that once valid salary reduction contributions have been deposited into a SIMPLE IRA, there is no SIMPLE IRA correction mechanism that allows the employer to simply pull the money back out of the employee's IRS.  Unless things have changed, in the past, we have found that IRA custodians normally won't return the money because it is not an excess contribution under the Code (i.e., the contributions didn't exceed the SIMPLE IRA annual limits and were properly deposited).

Like @justanotheradmin states, we see this type of mistake usually "corrected" under a practical approach.  Here, that would be correct the payroll contribution settings going forward and leave the contributions in the SIMPLE IRA.  If the employee is upset because the over-withholding caused cash-flow issues, reimburse the employee through payroll (some might gross this up, others wouldn't) and absorb the cost. Also, there should not be a "net out" going forward.  The employee's salary reduction election controls future payrolls so there should not be a reduction in future contributions without the employee's consent. 

In the event of an audit, document this to include a description of the employee's actual election, the payroll error, the three affected payroll dates (if in one quarter, also in one year), the correction implemented, (i.e., any reimbursement provided to the employee outside the SIMPLE IRA, no net out going forward), and concluding with something like a failure to implement the election generally/technically is viewed as an operational failure, but, given the these facts, this isolated payroll error was corrected administratively outside the SIMPLE IRA.  Really, since can't kick the money out and shouldn't reduce future contribution election, what else is there to do?