Controlled group & SIMPLE IRA issue
Hello,
I have a client who has 2 restaurants and a single member LLC.
She has a self-directed solo k at the LLC.
has SIMPLE IRA at one restaurant
but has no plan at the 3rd business.
collectively she has over 150 employees and it’s been that many for the past few years.
how can they fix it?
Also, what would be the penalty (if any) for not correcting this?
Permalink Submitted by William Tuttle on Fri, 2024-02-23 13:27
There is no statute of limitations (SOL) on such errors.
If not corrected promptly, there is a serious risk of penalties, sanctions and the even the possibility of disqualification of the one-participant 401k. The results of which could be catastrophic. A forced distribution of the entire balance subject to marginal income taxes, early withdrawal penalty and ineligible for rollover.
Your client was never eligible to adopt, maintain and contribute to the one-participant 401k in the first place. These were/are excess contributions. Which quite likely will have to be removed with all earnings
Not to mention, the client almost certainly discriminated against the employees at both restaurants. Violating anti-discrimination rules which are some of the most serious plan errors.
This would likely fall under the the IRS Employee Plans Compliance Resolution System (EPCRS), to fix the mistakes and avoid the consequences of plan disqualification.
Normally, such errors would require the correction of the errors and make the employees “whole”. However, I am not a professional retirement plans specialist. I don’t have the specific knowledge for the details.
The employer will need to engage a professional third party administrator (TPA) and/or possibly an ERISA lawyer.
This will likely be an expensive mistake to correct, but would be catastrophic if discovered in an audit.