Employee Paycheck Withholding for SIMPLE but no SIMPLE

Submitted by John Going on Thu, 2023-02-09 15:28

I am working on a tax return for a new client. Prior to me becoming their accountant, they were paying one of their employees and withholding money pre-tax for a SIMPLE account. The problem – The SIMPLE account was never set up and the employee deferral amounts remain a liability on the balance sheet.

Question – Since the funds were taken out pretax in 2022 and never put into a retirement account for the employee, what are my options to remedy this? Is it simply giving her a paycheck in 2023 for the amount of the 2022 total SIMPLE contributions withheld from the employees paycheck? Is there a better way to fix this?



Submitted by Alan - IRA critic on Thu, 2023-02-09 15:49

  • The following is copied from IRS Notice 98-4:
  • “What if an eligible employee is unable to establish a SIMPLE IRA? A. G4: If an eligible employee who is entitled to a contribution under a SIMPLE IRA Plan is unwilling or unable to establish a SIMPLE IRA with any financial institution prior to the date on which the contribution is required to be made to the SIMPLE IRA of the employee under Q&A G5 or G6, an employer may execute the necessary documents to establish a SIMPLE IRA on the employee’s behalf with a financial institution selected by the employer.”


Submitted by John Going on Thu, 2023-02-09 16:07

To confirm I am understanding your response correctly.  It seems I should have the employee establish a SIMPLE IRA account and have the employer fund that account.  If the employee is unwilling (which is not the case as she wants the funds deposited), the employer can set up the account for the employee and fund.  Am I interpreting your reply correctly? Thank you for the quick and helpful reply, Alan!



Submitted by Alan - IRA critic on Thu, 2023-02-09 16:37

Yes, but it sounds like the employer may be unaware of several SIMPLE IRA requirements. Does the W-2 show SIMPLE IRA contributions under Code S in Box 12?  Employee needs to determine if they have a 5304 or 5305 SIMPLE. With a 5305, all the employee SIMPLE IRAs must be held at a designated financial institution and the account is more likely to have been opened. Therefore this is more likely to be a 5304 where the employee can open their SIMPLE IRA at the custodian they wish. 



Submitted by Alan Weber on Thu, 2023-02-09 21:10

I am seeking an IRA advisor with expertise in U.S. citizens working and living overseas (expatriate – tax home outside U.S.). 



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