Save time with our cheat sheets, fact sheets, checklists & books!

March 3, 2009

I have clients who have excess contributions in their SIMPLE IRAs and we aren’t sure what to do with the excess contributions.

Share on print
Print
Share on facebook
Share on twitter
Share on pinterest
Share on linkedin

I have clients who have excess contributions in their SIMPLE IRAs and we aren’t sure what to do with the excess contributions.

QuestionI have clients who have excess contributions in their http://retirementdictionary.com/definitions/simpleira SIMPLE IRAs and we aren’t sure what to do with the excess contributions.

Answer

Excess amounts to SIMPLE IRAs are contributions made to an employee’s IRA in excess of certain limits. These excess amounts should be distributed from the SIMPLE IRA as soon as possible. An employer who sponsors a SIMPLE IRA may use the IRS’ http://www.irs.gov/retirement/article/0,,id=112985,00.html Voluntary Correction Program (VCP) to correct this error. Under the VCP, if an excess amount is attributable to elective deferrals, the plan sponsor may effect distribution of the excess amount, adjusted for earnings through the date of correction, to the affected participant. The amount distributed to the affected participant is includible in gross income in the year of distribution. The distribution is reported on Form 1099-R for the year of distribution with respect to each participant receiving the distribution. In addition, the plan sponsor must inform affected participants that the distribution of an excess amount is not eligible for favorable tax treatment accorded to distributions from a SIMPLE IRA plan (and, specifically, is not eligible for tax-free rollover). If the excess amount is attributable to employer contributions, the plan sponsor may effect distribution of the employer excess amount, adjusted for earnings through the date of correction, to the plan sponsor. The amount distributed to the plan sponsor is not includible in the gross income of the affected participant. The plan sponsor is not entitled to a deduction for such employer excess amount. The distribution is reported on http://retirementdictionary.com/definitions/1099rirsform Form 1099-R issued to the participant indicating the taxable amount as zero.

Under the VCP, if an excess amount is not distributed from the SIMPLE IRA plan, a special fee, in addition to the VCP submission fee, will apply. The plan sponsor is not entitled to a deduction for an excess amount retained in the SIMPLE IRA plan.

Notwithstanding the above, if the total excess amount in a SIMPLE IRA plan, whether attributable to elective deferrals or employer contributions, is $100 or less, the plan sponsor is not required to distribute the excess amount and the additional fee described in the preceding paragraph does not apply.

For additional information, see http://www.irs.gov/pub/irs-tege/simple__checklist.pdf Pub 4284 SIMPLE IRA Plan Checklist

This is a Q&A presented by the IRS and answered by the IRS from the March 2008 issue of the IRS Employee Plans Newsletter

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

Share on facebook
Share on twitter
Share on pinterest
Share on linkedin
Share on print
More

Keep Learning

SIMPLE 401(k) Plan

Definition A SIMPLE 401(k) plan is a 401(k) plan  established by a small business for it’s employees. Earnings accrue on a tax-deferred basis and distributions

IRA

Definition Individual retirement arrangement (IRA) is an umbrella term that covers individual retirement account and individual retirement annuity. These are retirement savings vehicles established by

2-Year Rule (SIMPLE IRA)

Definition 2-year restriction placed on transfers, rollovers and conversions of SIMPLE IRA assets. Under this restriction, SIMPLE IRA assets are ineligible to be transferred, rolled

Earned income

Definition Net income from self-employment with respect to a trade or business in which personal services of the taxpayer are a material income-producing factor. For

Be among the first to know when

IRA Rules
Change