SIMPLE Solution for Finding and Fixing SIMPLE IRA Plan Mistakes

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Note - Any federal tax advice contained in this transcript is intended to apply to the specific situation described and should not be considered official guidance independent of the presentation. The tax advice and statements contained herein should not be relied upon for retirement planning purposes without first consulting a tax or retirement planning professional. This transcript has been edited for technical accuracy and may differ slightly from the audio recording of the SIMPLE Solutions for Finding and Fixing SIMPLE IRA Plan Mistakes phone forum. This information is current as of September 27, 2010. Since changes may have occurred, no guarantees are made concerning the technical accuracy after that date.

Moderator:: Welcome to the SIMPLE Solutions for Finding and Fixing SIMPLE IRA Plan Mistakes Conference call. At this time all participants are in a listen- only mode. As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Mr. John Schmidt.

J. Schmidt: Hello, everyone. My name is John Schmidt, and I'm the Staff Assistant to the Director of Customer Education and Outreach for Employee Plans at the IRS. Thanks for dialing into our phone forum today entitled SIMPLE Solutions for Finding and Fixing SIMPLE IRA Plan Mistakes.

Today we'll be hearing from Rolando Cuervo, IRS Employee Plans Revenue Agent par excellence, who just completed a series of presentations during this summer's nationwide tax forums. Rolando is a great friend of the customer education outreach office, as is proven by his involvement as a featured speaker at the tax forums the past seven years. In addition, Rolando has been a writer and instructor within the IRS playing a significant role in our in-house continuing professional education training since 2002. In short, I can't think of a better person to be giving today's presentation.

Please note we will e-mail a certificate of completion to everyone who registered for this session and who attends the full session. Enrolled agents and enrolled retirement plan agents are entitled to Continuing Professional Education credit for this session. For tax professionals other than those I just mentioned, consult with your licensing organization to see if it will provide CPE credits for this session.

Now, if you don't mind, a bit of shameless self-promotion. The retirement plans' Website at has an array of information regarding SIMPLE IRA plans. For those of you not familiar with our Website you can also get there by going to the main IRS site at and clicking on the retirement plans community tab across the top. Once there look to the left hand navigation bar and click on types of plans.

Once on our Website you might also want to subscribe to one of our free electronic newsletters. A link for newsletter is in the left hand navigation bar where we have two newsletters from which you may choose, the Retirement News for Employers, which is directed towards employers sponsoring a retirement plan, and the Employee Plans News, which is directed towards professionals who practice in the retirement area. Check out our Web page and subscribe to our newsletters.

So, without further ado, it is my pleasure to hand the microphone, so to speak, over to Rolando Cuervo.

R. Cuervo: Thank you very much, John, and good afternoon to everybody. I hope that everybody's having a good day today. Today's topic is Simple Solutions for SIMPLE IRA Plan Mistakes.

Many of you, I'm sure, have clients who are setting money aside in a SIMPLE IRA retirement plan. How can they avoid mistakes in operating their SIMPLE IRA plans? Today we will provide detailed information as to how to find, fix, and avoid these SIMPLE IRA plan mistakes. At the end of today's session you will be able to locate the SIMPLE IRA plan Fix It Guide, Common Problems and Real Solutions on our Website at, and use the guide to help your clients find, fix, and avoid these common, SIMPLE IRA mistakes.

This presentation's workshop tips will help your clients stay a step ahead of the IRS and will also, like I said, be able to find it on our Website. We have developed many tools to assist you and your clients with retirement plan. Our Website is designed to provide information for the benefits practitioner, plan participant employee, and plan sponsor employer. You will find the IRS Fix It Guides we have four them so far that will provide real solutions to common problems in retirement plans and information on correcting plan errors. It also has other resources that will help you keep your clients out of trouble with the IRS.

There are two different ways that you may discuss your questions with a retirement plan specialist. You may call our customer account services toll free at 877-829-5500, or if you prefer you may e-mail your questions to Our specialists must respond to all e-mail questions by telephone, so please remember to include your phone number.

Finally, we have two free quarterly electronic newsletters you may subscribe to. The first is the Employee Plan News. This newsletter is geared toward the practitioner community. It provides current and technical retirement plan information. Our second newsletter is Retirement News for Employers. This newsletter is geared toward plan sponsors and provides them with information that will help them manage their plans. Being a Web based product, the newsletters can make an excellent reference guide. We have about 170,000 subscribers right now to these newsletters.

Subscribing to these newsletters is easy and it will keep you and your clients current with all the latest news regarding retirement plans. You can go to our Website, again at, click on newsletters in the left pane of the Website, click on Employee Plan News or Retirement News for Employers, then you click on subscribe, then provide us with your e-mail address. It's as simple as that.

The SIMPLE IRA Plan Fix It Guide describes the steps to find, fix, and avoid common mistakes we find in audits and voluntary compliance submission regarding SIMPLE IRA plans. You can view the guide, again, from the Website, and you can look for the link Fix It Guides: Common Problems, Real Solutions. Each of the potential mistakes found in the Fix It Guide includes tips on how to find a mistake, what corrective action and IRS correction programs you can use to fix the mistake, and common sense tips on how to avoid making the mistake in the future. If you click on the hyperlink more in the table found on the first page of the guide you will be directed to additional information, including examples on each of the potential mistakes.

Before we dive into the details of some of the mistakes let's take a few minutes to discuss the basics of SIMPLE IRA plans. SIMPLE stands for Savings Incentive Match Plan for Employees. A business can set up a SIMPLE IRA plan if it meets both of the following requirements. First, they must have 100 or fewer employees who receive $5,000 or more in compensation from the employer for the preceding year. There is a grace period, which I will discuss in a later slide, if the employer stops meeting the 100 employee limit in a later year. Second, the business does not maintain another retirement plan to which it makes contributions other than a collectively bargained plan that covers only union employees.

There are three basic steps in setting up a SIMPLE IRA plan. First, the employer must execute a formal written agreement; second, the employer must give each eligible employee certain information about the SIMPLE IRA plan; and third, a selected financial institution must set up a SIMPLE IRA for each eligible employee.

There are several ways an employer can adopt a formal written agreement. The simplest method is for an employer to adopt an IRS model SIMPLE IRA plan using either Form 5304 SIMPLE if the employer allows each participant to select the financial institution for receiving his or her contribution. If the employer requires that all contributions under the SIMPLE IRA plan be deposited initially at a designated financial institution then they should use Form 5305 SIMPLE. You can fill out and print this form from the IRS Website.

The SIMPLE IRA plan is adopted when the employer has completed all appropriate boxes and blanks on the form and he or she, and the designated financial institution, if any, has signed it. The employer should keep the original form; do not file it with the IRS. If your clients set up a SIMPLE IRA plan using either the Form 5304 SIMPLE or 5305 SIMPLE they can use the model identification included with the form to satisfy the notification requirement by giving each employee a copy of page three of either of the signed forms.

Another type of document an employer can adopt is a prototype SIMPLE IRA plan. Financial institutions and other approved organizations can sponsor a prototype and the IRS issues opinion letters approving them. Prototype plans are sold to and adopted by individual businesses. Adopting an individually designed document is a third method for setting up a SIMPLE IRA plan. Individually designed documents are rare, and the IRS does not have an approval process for them.

The employer must notify each employee of the following information before the beginning of the time periods when the employee has an opportunity to make or change a salary reduction choice under the SIMPLE IRA plan: the employer's choice to make either matching contributions or non-elective contributions, if applicable the requirement to select the financial institution that will serve as the trustee of the participant's SIMPLE IRA, a summary description of the plan, the financial institution will provide this to you, and written notice that the employee's balance can be transferred without cost or penalty if you use a designated financial institution, and the final one, finally a SIMPLE IRA must be set up for each employee who is eligible to be in the plan.

SIMPLE IRAs can be set up with banks, insurance companies, or other qualified financial institutions. And the employer sends the SIMPLE contributions to where the SIMPLE IRAs are maintained. As a general rule, an employer can set up a simple IRA plan for a year as late as October 1st of that year.

So which employees have to participate? Generally any employee who earned $5,000 or more during any two preceding calendar years and is reasonably expected to earn at least $5,000 during the current year must be included in the SIMPLE IRA plan. There are some exceptions; the employer may exclude those employees who are covered by a union agreement and whose retirement benefits were bargained for in good faith by the employer and the employee's union, non-resident alien employees who have no U.S. wages from the employer.

Under a SIMPLE IRA plan contributions are subject to certain limits and are always 100% vested. Contributions to a SIMPLE IRA have two components. First, salary reduction contributions; the amount of money that an employee asks to have withheld from their pay and paid into the plan. And secondly, employer contributions. Salary reduction contributions are limited to $11,500 for 2010 unless the participant is age 50 or over. So if you're age 50 or more during the year you may contribute $11,500 plus an additional $2,500 that we refer to as a catch up contribution.

The employer is required to make either matching contributions of up to 3% of employee's compensation or non-elective contributions of 2% of an employee's compensation. Note that the employer may reduce this 3% to a lower percentage, but not lower than 1%, and the 3% may not be lowered for more than two calendar years out of the five-year period ending with the calendar the reduction is effective.

Let me talk briefly about taking money out of a SIMPLE IRA, because the SIMPLE investment vehicle is an IRA and the IRA rules apply. Employees can withdraw SIMPLE IRA contributions and earnings at any time. Money withdrawn is taxable in the year it is received. If an employee makes a withdrawal before he or she is age 59 ?, a 10% additional tax generally applies. However, this tax is increased to 25% if the withdrawal is made in the first two years of participation in the plan. Employees may roll over SIMPLE IRA contributions and earnings tax-free to other IRAs and retirement plans, however during the first two years of plan participation rollovers can be made only to other SIMPLE IRAs.

SIMPLE IRA contributions and earnings must eventually be distributed. The law requires specific minimum amounts to be distributed each year beginning no later than April 1st of the year following the year the employee turns age 70 ?. An employer has no filing requirements of the Form 5500 series return for a SIMPLE IRA plan. This is similar also to SEP IRAs; they do not have to file 5500s. The financial institution that holds the SIMPLE IRAs handles most of any other paperwork.

Let's look now at an EPCRS overview. If an employer makes a mistake in a SIMPLE IRA plan it may use IRS Employee Plan Compliance Resolution System, or how we refer to it as EPCRS, to remedy the mistakes and avoid the consequences of plan disqualification. A correction for mistakes should be reasonable and appropriate. The correction method should resemble one already provided for in the code and the employer should consider all applicable facts and circumstances. There are three components to EPCRS found in Revenue Procedure 2008-50.

Let's talk about the first component, self-correction. In order to be eligible for the Self Correction Program, or how we refer to it as SCP, the plan sponsor or administrator must have established formal or informal practices and procedures in place. They must be reasonably designed to promote overall compliance with the code or sample. The plan sponsor of a SIMPLE IRA plan may include in his plan operating manual specific steps to determine when new employees are eligible to enter the plan so that the eligibility rules of the code are satisfied. We have been asked if a plan document alone is evidence of established procedures. It is not.

SCP is available for correcting operational problems only, that is the failure to follow the terms of the plan. SCP is not available for other types of problems, such as failing to keep the plan document up-to-date to reflect law changes. This is what we refer to as a form violation, not an operational problem. We will talk about this issue in more detail later in this presentation.

Under SCP the plan sponsor corrects the mistakes using the general correction principals described in the EPCRS Revenue Procedure. If a plan sponsor corrects a mistake in accordance with the correction method included in Appendix A or Appendix B of this Revenue Procedure it may be certain that the correction is reasonable and appropriate for the mistake. The plan sponsor may need to make changes to its administrative procedures to ensure the mistakes don't happen again. Self-correction may be used only if considering all the facts and circumstances the mistake in the aggregate are insignificant operational failures.

How do you decide if a mistake is significant or insignificant? Revenue Procedure 2008-50 lists some facts and circumstances to consider. Examples include the percentage of plan assets involved in the failure, the number of years the failure occurred, and where the correction was made within a reasonable time after the discovery of the failure. If you and your client determine the failure is insignificant then document how you came to that decision.

When using SCP the plan sponsor should maintain adequate records to demonstrate that they have corrected the mistake in the event of an audit of that client later on. And the best part is there is no fee for self-correction that is why it's a very popular program. Think of this program as similar to changing a tire on your car when you get a flat.

The next phase of EPCRS is the Voluntary Correction Program. This is more like taking your car into the shop to get your brakes fixed. It's available for both significant and insignificant mistakes. Under VCP, the plan sponsor identifies the mistakes and proposes correction using the general correction principals described in the EPCRS Revenue Procedure. The plan sponsor proposes changes to its administrative procedures to ensure the mistakes do on recur, and for SIMPLE IRA plans pays a compliance fee to the IRS of $250. The IRS will issue a compliance statement, which details the qualification mistakes identified by the plan sponsor and the correction approved the IRS. The plan sponsor corrects the identified mistakes within 150 days of this compliance statement. While the submission is pending employee plans will not examine the plan except under very unusual circumstances.

Under Audit Cap, the plan is under examination. The plan sponsor corrects the mistake and enters into a closing agreement with the IRS. This is the third step in the EPCRS program. There's Self Correction, Voluntary Correction, and if the plan is selected for an audit then there's still Audit Cap available to fix it. The plan sponsor pays a sanction, which has been negotiated with the IRS, and it's based on the sum for all open tax years of the maximum payment amount, which is basically the total amounts of tax due if the plan were disqualified, and is determined by adding the additional income tax and interest and penalties that the employees would have had to pay if contributions to the SIMPLE IRAs were included in their income, and two, additional tax resulting from the 6% tax on excess contributions to an IRA. The sanction paid under Audit Cap is greater than the fee one would have paid under Voluntary Correction Program, or VCP. Envision this program as your car breaking down on the freeway and being towed to the shop.

Let's look at the streamlined VCP submissions that are available. We are trying to make it easier for small employers to file a VCP application without hiring a retirement plan professional to do the job. We have a streamlined application process for some areas in retirement plans submitted under the Voluntary Correction Program. Appendix F of the EPCRS Revenue Procedure 2008-50 has been substantially expanded to add additional failures that commonly occur in plans maintained by small employers and significantly reduces the burden and cost to an employer of submitting under the VCP program.

There are several schedules that can be submitted with the Appendix F application. For example, Schedule 2 deals with non-amender failures; this is what I referred to earlier as a form violation where the plan document was not amended for current laws. Schedule 4 is specifically for SIMPLE IRA plan, and includes errors commonly found in this type of plan.

Part 1 of Schedule 4 asks the applicant to identify the failure and correction method. Four potential failures can be submitted with this schedule: employer eligibility failure, failure to make required employer contributions, a third, failure to provide eligible employees with the opportunity to make elected deferrals, and the last one, excess amounts contributed. Part 2 of the schedule requires a description of changes made to administrative procedures to ensure that these errors do not occur in the future, Part 3 is a request for excise tax relief if it's applicable, and Part 4 lists required enclosures.

Correcting errors in a plan does not have to be intimidating. We want employees to enjoy their retirement savings. Mistakes happen, and they can almost always be corrected under one of our correction programs. So let's take a look at some of the mistakes that we see most often in retirement plans and discuss how you and your clients can find, fix, and avoid these mistakes.

On the slide you see the first common mistake, an ineligible employer. A couple of questions must be answered prior to establishing a SIMPLE IRA plan; did the employer have more than 100 employees making $5,000 or more in the previous year and does the employer sponsor another retirement plan. If your client answered yes to either of these two questions then he or she should not establish a SIMPLE IRA plan. A SIMPLE IRA can only be established by employers who do not sponsor another retirement plan and who only had 100 or fewer employees making $5,000 or more.

There is an exception; if the employer sponsors a collectively bargained plan they can provide a SIMPLE IRA plan for other employees. Generally no contributions can be made through a SIMPLE IRA plan during any calendar year in which an employee receives contribution or accrues a benefit from another retirement plan beginning or ending in that calendar year.

Let me give you an example of the one plan rule. An employer maintains a calendar year profit sharing plan. For the current calendar year the employer adopts a SIMPLE IRA plan, although the employer does not formally terminate the profit sharing plan it does not make any contributions to that plan for the calendar year. Since there were no profit sharing contributions made there was no exclusive plan violation, and the maintenance of a SIMPLE IRA plan is permissible for the current calendar year.

Now let me give you an example of the 100-employee rule. Remember an employee includes full time, part time, and seasonal employees. In addition, if you client's business is a member of a controlled group or an affiliated service group, all of the employees of all of the groups are considered employees.

So in my example let's say Paul owns a computer rental agency, I'll call it Business A. Business A has 80 employees who received at least $5,000 in 2009. Paul also owns Business B that repairs appliances or toasters. It has 60 employees who received at least $5,000 in compensation in 2009. Paul is the sole provider of both businesses. Code Section 414 C provides that employees of partnerships and sole proprietorships that are under common control are treated as employees of a single employer, thus all 140 employees will be treated as employed by Paul, and neither Business A nor Business B would be eligible to establish a SIMPLE IRA plan.

So how do you find this mistake? Review compensation data, such as payroll records, W-2s, and quarterly filings with the state to determine if there were more than 100 employees who earned $5,000 or more in compensation during the previous year. Generally compensation means the sum of wages, tips, and other compensation subject to Federal income tax withholding. Determine whether any employee received an allocation or accrued a benefit in another qualified plan that was sponsored by your client, or a control group or an affiliated service group of which your client was a member for any part of the calendar year.

How do you fix this mistake? If this is the first year of the plan your client should stop making any new contributions to the plan. If relief is not requested or granted under VCP salary deferral contributions and their related earnings would have to be returned to the employees. The returned amounts are reported on Form 1099R as a taxable distribution that is not eligible for rollover. Employer contributions and related earnings will be returned to your client.

Remember that no contributions should have been made to the SIMPLE IRA plan if relief is not granted under VCP, or the Voluntary Correction Program. The contributions are considered excess contributions and subject to excise taxes. A Form 5330, excise tax return, should be filed. In addition, for each year that excess contributions are made to a participant's SIMPLE IRA the affected participant is liable for the excise tax.

So if your client has this mistake which correction programs would be available? Your client may not correct this type of mistake under the Self Correction Program, SCP. In order to retain plan qualification your client must correct this mistake under VCP. Your client can make a VCP submission to the IRS identifying the mistake, and the fee for correcting this mistake is $250. If the IRS discovers this mistake on audit your client may correct it under Audit Cap. The method of correcting this mistake will be the same as under VCP or Audit Cap, but the sanction of the Audit Cap is a percentage of what we call the maximum payment amount and would be greater than the $250.

How do you avoid this mistake? Prior to establishing a SIMPLE IRA plan ask your client to make sure that he or she takes all employees into account for purposes of the 100 employee count. All part time, seasonal, and leased employees who earned at least $5,000 in compensation in the prior year must be included, as well as employees of any controlled or affiliated service group. Make sure that no employer member maintains any other qualified retirement plan. If there is another plan and your client wants to establish a SIMPLE IRA plan then ask him or her to take the steps to terminate the qualified plan before the calendar year for which he or she contributes to the SIMPLE IRA plan. In addition, if your client had less than 100 employees and the business grew to the point where it exceeded the 100-employee count then there is a grace period. Generally the grace period is two calendar years following the year in which the 100-employee limitation was satisfied. During the grace period the employer may still contribute on behalf of the effected employee. In addition, the employer would have the opportunity to set up another type of retirement plan that it could sponsor for the benefit of its employees, but only after the year of the last contribution to the SIMPLE IRA plan.

Let's look now at another common mistake, SIMPLE IRA plan that's not current. In other words, it's what we call a non-amender because they have not complied with the current law. Laws related to retirement plans change quite frequently. There are statutory deadlines, by which date many provisions must become effective. The IRS generally establishes a firm deadline for adopting these changes. In addition, these law changes might mean your client can simplify in some areas of plan administration or improve benefits. Your client will need to change plan language and operation to keep the plan within the law and to take advantage of the increased benefit limits.

How do you find this mistake? If your client is using an IRS model plan, which again would be the Form 5304 SIMPLE or 5305 SIMPLE, please make sure that your client is using the current revision date, which is currently September 2008. As noted in the instructions, those employers who use the Form 5304 SIMPLE or the 5305 SIMPLE with a revision date of March 2002 or August 2005 are not required to use the September 2008 version. If your client is using a financial institution's SIMPLE IRA prototype document check with the financial institution to see if it has received an IRS opinion letter that ruled that the SIMPLE IRA prototype document complies with current law.

And again, like I said earlier, it is rare, but individually designed SIMPLE IRA plans must also be updated for law changes. If this is your client's situation her or she may want to consult a benefits professional.

What corrective action should your client take to fix this mistake? Your client should adopt a current IRS SIMPLE IRA model plan or IRS approved SIMPLE IRA prototype plan. For years in which your client did not update the plan by a valid plan document the SIMPLE IRA could lose the tax benefits associated with contributions made to the SIMPLE IRAs and the earnings accumulated in those SIMPLE IRAs unless your client uses the Voluntary Correction Program. Revenue Procedure 2002-10 states that all SIMPLE IRA plans need to be updated for the law changes made by the Economic Growth and Tax Relief Reconciliation Act of 2001, as known as EGTRRA.

One example of an EGTRRA change is increased contribution limits. Failure to update the law changes deserves special attention, as we are finding in our audits that over 50% of all SIMPLE IRA plan reviewed have not been timely updated for EGTRRA. Additionally, employers should give notice to employees of the new contribution limits for EGTRRA.

Let's take a look at an example. Employer Y established a SIMPLE IRA plan in 2000 using a model plan Form 5304 SIMPLE. Starting in 2002 EGTRRA contribution limits were used by the employer. Employer Y in this example was required to adopt the IRS SIMPLE IRA model plan that was issued on March 2002 or later. If employer Y did not adopt this model plan and provide notice to employees of the new contribution limits for EGTRRA then employer Y would have to use EPCRS to correct this mistake.

So if your client has this mistake which correction programs are available? As I said earlier, SCP, or the Self Correction Program, is only available for operational problems. So since this will be considered a form error, SCP would not be available to correct this mistake. Your client must correct this mistake under VCP, or the Voluntary Correction Program. Your client can make a VCP submission to the IRS identifying the mistake. The fee for correcting this mistake is $250. If the IRS discovers this mistake on audit your client may again correct it under Audit Cap. The method for correcting would be the same as if it would have occurred under VCP, but the sanction under Audit Cap is a percentage of the maximum payment amount and would be greater than the $250.

How would your client avoid this mistake? If your client is using the IRS SIMPLE IRA model plans, which again are the 5304 or 5305 SIMPLE forms, visit the IRS Website before the end of each calendar year and find out whether the IRS has updated the applicable model plan. If there is a newer version of the form on the Website you should check the instructions to determine whether adopting the newer form is necessary. If you are using a financial institution SIMPLE IRA prototype then check with the financial institution to ensure that there are proper procedures in place that will ensure that they send any required updates that your client needs to sign in a timely manner.

Now let's look at another common mistake that we have found on audit, eligible employees that are not participating. Under the general participation rule for a SIMPLE IRA plan, employees who you reasonably expect to receive at least $5,000 of compensation during the calendar year and who did so in any prior two years are eligible to participate in a SIMPLE IRA plan. Employers may increase the number of employees eligible to participate by lowering the $5,000 amount or by allowing all employees to participate regardless of how much they earn.

How would you find this mistake? Review the SIMPLE IRA plan document to determine who your client must allow to participate. Compare past payroll information with employees who participated in the SIMPLE IRA plan. For example, you would review the payroll data, W-2s, the quarterly returns filed with the state, and internal payroll records for prior years.

You could also list all employees who earned at least $5,000 from your client during any two preceding years and are expected to receive at least $5,000 in compensation in the current year. For each employee that did not either make a salary deferral contribution or receive an allocation of employer contribution you would want to make certain that they were properly excluded by the terms of the plan. If the employer improperly excluded any of them from the plan then this could be an indicator of a larger problem and you could expand the search to include other employees. This might require review of payroll data that is more than two years old.

What corrective action should your client take to fix this mistake? During the period of an eligible employee was improperly excluded, the employer must make up for his or her missed deferral opportunity that is equal to 1.5% of the eligible employee's compensation plus earnings. The 1.5% is half of what we would call the 3% matching contribution. In addition, the employer is required to make a matching or non-elective contribution plus earnings. Calculate earnings from the date that the employer should have made the contribution up to the date of correction.

Let's look at an example. Nancy met the eligibility requirements under her employer's SIMPLE IRA plan, however the employer excluded her from making a salary reduction contribution. During the year that her employer excluded her she earned $10,000. The terms of the plan also required an employer contribution of 3% of compensation.

Let's look at the missed deferral opportunity. Since the plan matches deferrals up to 3% of compensation it is assumed a typical employee would defer at least 3%. Nancy's missed deferral opportunity is 3% times $10,000, or $300. The required corrective employer contribution to replace Nancy's missed deferral opportunity is 50% of the $300, or $150. That's how we came up with the 1.5% of eligible employee's compensation plus earnings.

The employer contribution is a different matter. Under the terms of the plan the employer's matching contribution was 3% of eligible employee's compensation. Nancy was also entitled to receive an employer matching contribution of $300 plus earnings. If under the plan the employer was required to make a non-elective contribution instead of a matching contribution of 2% of the eligible employee's compensation then the missed deferral opportunity would still be $150 and the non-elective contribution will equal 2% of compensation, or $200.

Which correction programs would be available for this mistake? Well the example illustrates an operational problem, so therefore SCP would be available if the mistake is deemed to be insignificant and the other eligibility requirements of SCP are satisfied. There are no fees for self-correction, but the employer must make the correction and have practices and procedures in place to try to assure that this does not happen in the future. Under VCP correction would be the same, and the employer would make a VCP submission to the IRS and pay a fee of $250. And of course Audit Cap is always available, and the correction would be the same. The employer and the IRS would enter into a closing agreement outlining the corrective action and negotiate a sanction based on the maximum payment amount.

How can you advise your client to avoid this mistake? Your client should review the participation status of all employees at least once a year. The person assigned the task should have a good understanding of the eligibility requirements and have access to the employment and payroll records necessary to make eligibility decisions for all employees.

Now let's look at another problem that we see, required employer contributions that were not made. There are two potential mistakes included in the Simple IRA Plan Fix It Guide that involve the employer contribution. Mistake number five, were correct employer contributions made on behalf of the eligible employees, and mistake number ten, did you make employer contributions to all eligible employees whether or not they terminated during the plan year.

An employer must make matching or non-elective contributions to all eligible employees; this means all of the employees who have satisfied the eligibility requirement that we discussed earlier in the presentation. A SIMPLE IRA plan cannot require employment on a particular day, such as the last day of the year, in order to receive matching or non-elective contributions. The required employer contributions must either be 2% of an employee's compensation, regardless of whether they made a salary deferral contribution, or a matching contribution equal to an employee's salary deferral up to 3% of such employee's compensation.

How would you find this mistake? Review employee payroll information to determine if all employees who have satisfied the eligibility requirement of the plan have received an employer contribution. This must include any employee who terminated employment during the year. Review plan document provisions relating to employer contributions. Based on those provisions and compensation data for all employees, calculate the employer contribution that the employer should have made on behalf of those participants. Compare the calculation with the amounts the employer actually contributed on behalf of the participant. If the amounts contributed differ then there is a possibility that your client is not following the plan's terms.

How to fix this mistake? If additional amounts are required, contribute the make-up amount adjusted for earnings from the date of the mistake to the date of correction. If your client contributed an amount in excess of an employee's benefit distribute the excess amount adjusted for earnings through the date of correction. Report the distribution on a Form 1099R issued to the participant indicating the taxable amount as $0.

Let's take a look at some examples. Your client asks you to look at a SIMPLE IRA plan to make sure everything is okay with its operation. The SIMPLE IRA plan provides for a 2% employer contribution for all eligible employees. You review the plan operations and find that one of the employees, Ann, met the plan's eligibility requirements and should have received an employer contribution, but did not. All of the other plan participants received a non-elective employer contribution in the amount of 2% of compensation. Ann's compensation for the year was $30,000.

So how would you fix this error? The company must contribute additional amounts to the plan for Ann. The corrective contribution is determined by calculating the contribution Ann would have been entitled to receive under the terms of the plan and subtracting any contributions already made for Ann for the plan year. So in our example Ann should receive a corrective contribution in the amount of $600. This is her compensation of $30,000 multiplied by 2%, what the employer contribution percentage is under the plan terms.

The corrective contribution made for Ann must be adjusted for earnings. Earnings are calculated from the date the contribution should have been made through the date of the corrective contribution. The corrective contribution adjusted for earnings will be made into each of the affected employee's SIMPLE IRA account. If an affected employee does not have a SIMPLE IRA account an account must be established for that employee. If the plan did not provide eligible employees with the opportunity to make an elective deferral and the plan provides for a matching contribution, the corrective matching contribution must be made on the assumption that the eligible employee would have made an elective deferral equal to 3% of compensation. This we covered in a previous example.

The earnings calculation for an affected employee may be based on one of the following methods: actual investment results of the affected employee's SIMPLE IRA account, and also they can use the interest rate incorporated in the Department of Labor's Voluntary Fiduciary Correction Program online calculator, known as VFCP online calculator. This is found on the DOL Website, which is, since the actual earnings of the affected employee's IRA account cannot be ascertained. As a revenue agent when I've seen this I usually go through the actual experience of the plan for the earnings during those years. Actual investment results for years in which data is available or the rate incorporated in the VFCP online calculator for years in which the actual earnings of the affected employee IRA account cannot be ascertained.

Let's assume, for example, that Ann had a SIMPLE IRA account and it earned 5% during the time that the contribution was missed. In our example earnings on the contribution in the amount of $30 would also be needed to be deposited by the employer to Ann's SIMPLE IRA account.

Now which correction programs would be available for this mistake? The mistake can be corrected under SCP if it is determined that this is an operational problem and the mistake is insignificant. In this case since it was only one employee chances are that it could be ruled insignificant. You may make a VCP submission to the IRS identifying the mistake on your client's behalf, and of course the fee for this VCP submission would be $250. If the mistake is discovered on audit, again, it would be corrected under Audit Cap, and the correction method would still be the same as if it was done under SCP or VCP, but again the sanction amount under Audit Cap would be higher than these two programs.

How can you avoid this mistake? The individuals administering the SIMPLE IRA plan should be familiar with the terms of the plan document. After gaining familiarity with the key provisions of the plan document the person administering the plan can make sure that plan procedures, for example, checklists, software, manuals, method for calculating compensation, calculations of the required employer contribution, and methods for deposit allocation, ensure compliance with plan terms.

Now let's go into another problem that we have seen on audits for SIMPLE IRA plan, salary deferrals not deposited timely. If a SIMPLE IRA is subject to Title 1 of ERISA, and most with common law employees are, then the Department of Labor, or DOL, requires that salary deferral contributions be made to the employee's SIMPLE IRA accounts at the earliest administratively feasible date after deferrals are withheld from the employee's salary.

They recently published a final rule to protect employee contributions deposited to small retirement and welfare benefit plans with fewer than 100 participants by providing a safe harbor period of seven business days following the receipt or withholding by employers. This was effective January 14th of this year. The IRS requires that plan sponsors make the salary deferral contributions no later than 30 days following the month in which they withheld the deferrals from the employee's salary.

So an example, contributions withheld from an employee's paycheck in January must be deposited by March 2nd, 30 days following January 31st, assuming that February has only 28 days in that particular calendar year. But the rule of thumb is always try to do it as quickly as you can that's administratively feasible when you can properly segregate the amounts.

How to find the mistake? Compare the date that the salary deferral contributions were withheld with the date the salary deferrals were contributed to the employee's SIMPLE IRA account. If the deposits don't meet the 30-day rule the plan has a qualification defect.

To fix this mistake in addition to making elective deferral amounts to the employee's SIMPLE IRA you should make a contribution of earnings that the deferrals would have earned from the date that you should have deposited the amounts through the date of the actual deposit. Again, you can use the plan's let's say earnings experience for this.

Which correction programs are available? The mistake, again, could be done under SCP since it is an operational mistake, and of course it would have to be insignificant, maybe only a fraction of the employees were affected or the amount was extremely immaterial compared to the total amount in the plan. Also you may use the VCP submission to the IRS identifying the failure on behalf of your client, and again that amount for the VCP submission, the fee, would be $250. Again, if a mistake was discovered during an audit it may be corrected under Audit Cap. Again, the correction methods would be similar to what you would have done under SCP or VCP, but again the sanction would be higher because it would be a percentage of the maximum payment amount. Your client should also correct this mistake under the Department of Labor's Voluntary Fiduciary Correction Program if it is applicable.

To avoid this mistake your client should establish administrative procedures to ensure that he or she makes the employee salary deferral contributions to the employee's SIMPLE IRA shortly after being held from their paycheck.

Let's look into the Fix It Guides. We have discussed and focused on the most frequent problems that we see in SIMPLE IRA plans and how to find, fix, and avoid these problems in today's session.

We also have Fix It Guides for 401(k) plans, SEP IRA plans, and SARSEP plans to help you and your clients find, fix, and avoid mistakes in these types of plans. You can easily view or download these guides on our Website, and again that Website is They are a great resource to help you explain mistakes to your clients and to emphasize their need to fix these mistakes sooner rather than later and how to avoid them in the first place. If you look at the actual Fix It Guide you will see that it has many columns where it tells you what the problem is, how to fix it, how to find the problem, and how to avoid it in the future, and usually the top 10 or 11 problems that we have seen in the different type of plans, so it's an extremely good guide. Additionally you can find more in-depth information on correcting plan errors on our correcting plan errors Web page.

Maybe after reviewing the SIMPLE IRA Fix It Guides you or your client may find that a SIMPLE IRA plan is not the right plan for them. We have a publication, Choosing a Retirement Solution for your Small Business, that may help your client choose a plan that better fits their needs. Our online retirement plans navigator, found on, is a great tool to help you choose the plan that best suits their need. And this publication is one of my favorites, because it has a chart in the middle of it on two pages that basically compare from the simplest to the hardest type of retirement plans, and it has all the different categories, contributions, distributions, etc., and you can easily maybe find a plan that suits your client's needs.

In conclusion I want to thank everybody for participating in today's phone forum, and I hope everybody has a great day. Thank you so much.

Moderator: That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.