after-tax SIMPLE IRA contributions

Submitted by David Pratt on Wed, 2015-12-09 03:43

I’ve run into an employer that has incorrectly handled employee SIMPLE IRA payroll deductions since 2008 (actually, the payroll provider did, but the employer was clearly not paying enough attention) – all such deductions were taken after tax. What to do? Seems like the employees have basis in these IRAs – would the IRS ultimately buy that?



Submitted by Alan - IRA critic on Wed, 2015-12-09 04:35

  • How many employees were affected? Hard to believe that for 7 years all the W2 forms were wrong and no one noticed. Must not be very many employees.  And was the employer’s tax return correct?  The EPCRS guide for correcting SIMPLE plan errors do not even touch on this situation. I suggest a thorough review regarding all the other SIMPLE IRA violations that could exist, then contact the IRS to request what corrective action to take for all the infractions. Something tells me that the W-2 forms are not the only error.
  • Just a guess, but the 2012-2014 open tax years require corrected W-2 forms and the employees need to amend their returns for the tax refund. The SIMPLE IRAs can only accept pre tax contributions, so there is no basis in them. For the older years closed tax years, the employees might have a legal case to request damages for their lost tax money because they are going to get taxed again when they take distributions. They may need to go after the employer and the payroll company unless the IRS corrective procedure somehow compensates them. But I would not do anything until the IRS benefit plans unit responds to this issue. I have never heard of this happening before, so it would be interesting to know what the IRS says. Meanwhile, they need to make sure the 2015 W 2 forms are correct.

 

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