SIMPLE IRA Excess Contribution

Submitted by Scott Reid on Fri, 2020-10-23 15:58

I have an excess contribution to a SIMPLE IRA of $8,400 for 2019. Do I need to remove the excess contribution in 2020 or can I leave the $8,400 excess in the Plan and contribute $5,100 in 2020 (8,400+5,100=13,500)?



Submitted by William Tuttle on Fri, 2020-10-23 17:59

  • Direct quote from th IRS; “If the employee does not take out the excess deferral by April 15, the excess, though taxable in the year of deferral, is not included in the employee’s cost basis in figuring the taxable amount of any eventual benefits or distributions under the plan. In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed.” There is no ability to carry this forward for 2020 employee deferrals.
  • From the IRS SIMPLE IRA Plan Fix-It Guide:If you contributed more than was requiredIf you contributed more than the amount required by the terms of your SIMPLE IRA plan document and annual notice, then you should correct by using either the:
    • Distribution Method – effect distribution for the excess amount, as adjusted for earnings (see Revenue Procedure 2019-19 PDF section 6.11(5)(a)). The earnings adjustment will be based on the actual rates of return of the participant’s SMPLE IRA account from the date(s) that the excess deferrals were made through the date of correction.
      • When the excess amount is because of:
        1. elective deferrals – distribute and report on Form 1099-R PDF as taxable for the year the distribution is made.
        2. employer contributions – distribute to the plan sponsor rather than to the participants and report on a Form 1099-R issued to the participant, with a taxable amount of zero.
      • Retention Method – retain excess amounts in the SIMPLE IRA while you take some additional actions detailed in Rev. Proc. 2019-19 PDF, section 6.11(5). If this correction method is used the plan sponsor must pay an amount to the IRS that is at least 10% of the excess amount. This is in addition to the Voluntary Correction Program user fee. Note this correction method is not available under SCP.

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