Excess Simple IRA Employer Contributions
New client that is a self employed Individual that has a Simple IRA plan and over contributed the match amount for 2 years (2013 & 2014) and also over deducted the match on their tax returns for those 2 years. I told the taxpayer to correct the excess contributions for each year. Their IRA custodian withdrew the 2014 excess by 10/15/15 and withdrew the excess 2013 plus earnings by 12/31/15. The 2015 Form 1099R includes both year’s excess amounts and has a code E in box 7.The excess contributions are 3% of the total Simple IRA account balance. Shouldn’t the 2014 excess had earnings calculated on it and those withdrawn too, but no 6% excise tax calculated on F5329. Then, shouldn’t the 2013 excess plus earnings be subject to 6% excise tax for 2013 and 2014 on F5329. Also, shouldn’t 2013 and 2014 tax returns be amended for the over deducted amounts? In 2015, with a code E in box 7 of Form 1099R, my software doesn’t allow any 6% excise tax penalty to be calculated. Is the 2015 Form 1099R correct? Were the proper amounts withdrawn from the simple IRA? Does the EPCRS self-correcting route only subject the taxpayer to ordinary income tax on the excess withdrawl and no 6% excise tax? Any suggestions?
Permalink Submitted by Alan - IRA critic on Sun, 2016-02-28 01:14
This paragraph (Rev Procedure 2013-12, Sec 6.11 seems to agree with the 1099R. The excess employer contributions adjusted for earnings are simply removed from the SIMPLE IRA and returned to the employer. The SIMPLE owner is not taxed, but the employer cannot deduct the excess contributions:
Permalink Submitted by Cathy Earley on Sun, 2016-02-28 16:00
Alan, I have read that rev proc & the form 1099r instructions & have come to the same conclusion. However, I believe the earnings on 2014 should have been calculated & withdrawn also. No penalties and the excess contribution plus earnings is returned to employer. I just don’t understand why the earnings are not subject to tax. So, appears quite a loophole where simple ira sponsors could over contribute and receive tax free earnings by making corrections. Do you agree? Now, I will need to try to convince this client to amend those returns for the excess deductions.
Permalink Submitted by Alan - IRA critic on Sun, 2016-02-28 16:13
Yes, the 2014 earnings should also have been distributed. I agree that it would make sense to tax the earnings, but there is no deduction for losses either. Note that earnings on excess elective deferrals are taxed, just not employer contribution excess amounts.
Permalink Submitted by Cathy Earley on Sun, 2016-02-28 16:31
Thanks Alan, your analysis is appreciated.
Permalink Submitted by Jimmy Rench on Thu, 2016-12-29 22:35
I had the same thing happen to one of my clients prior to year-end. Over contributed on the employer’s behalf by $3,550. Custodian informed me that this money cannot be withdrawn. It is a non-deductible contribution per I.R.C. § 4972. Said that the amount is rolled over to the next tax year and subject to 10% excise tax.
Permalink Submitted by David MAURICE on Fri, 2017-01-20 00:28
My client wants to transfer/direct rollover her SIMPLE IRA account from a previous employer to a traditional IRA we will manage. Her previous employer continued to make contributions to her SIMPLE IRA AFTER her she teriminated her job . It would appear from the foregoing discussion that her past employer needs only to determine the cutoff dates for those contributions so that either his payroll company can reverse those contribtutions and the growth attributable to those contributions back to his account prior to her transfer of funds. Or, should the employer or his payroll firm refuse to do this, she could make the transfer, distribute this amount and return these funds to her employer. Does that connect the dots in a manner that’s consistent with the foregoing discussion?David
Permalink Submitted by Alan - IRA critic on Fri, 2017-01-20 01:16
Is is possible that the contributions are matching or non elective contributions, or otherwise required to be made? If not and a rollover is done and contributions need to be returned, the TIRA custodian can be told what the excess contribution to the TIRA is and it can be withdrawn as a corrective distribution. Any earnings would be subject to tax and possibly 10% penalty. It would be simpler to have the contributions investigated before doing the IRA rollover. Note that the 2 year limitation would also apply to SIMPLE IRA distributions.