Excess Employer Contribution to Simple IRA
Employer (a Corporation) made an error and contributed more than the 3% employer match to one employee’s Simple IRA. Error detected in January of the following year. IRA custodian was notified a correction needed to be made due to the overfunding of the employer contribution. However, I think we may have a problem because the check issued by the IRA custodian to refund the excess was made payable to the employee (not the employer).
My understanding is (1) that the excess employer contribution plus attributable earnings should have been paid to the employer and (2) that the employee should receive a 1099-R showing the distribution in Box 1, the taxable amount of $0 in box 2, and a distribution code e.
Since it appears that the IRA custodian is handling the transaction differently from what we had anticipated, I wanted to reach out to you for any comments you may be able to provide regarding how the correction should have been handled by them. Thanks!
Permalink Submitted by Alan - IRA critic on Tue, 2025-02-11 19:23
Your understanding of how this SHOULD HAVE been corrected is correct, including the 1099R issued to employees. The check should have been payable to the employer. The spirit of EPCRS resolution at this point would be to attempt to claw back the distributions paid to this employee, since they have no legal entitlement to it.
If the check had not been distributed to the employee, it could have been left in the SIMPLE and the employer could have used the “retention method” that involves paying a User fee plus a sanction of 10% of the excess and not taking a deduction for the excess matching contribution. Clawing back the excess from the employee seems easier.