SIMPLEs were designed by Congress in 1996 to make it, well simple, for employers with fewer than 100 employees to establish tax-advantaged retirement plans for their employees. Hence, the legislative branding naming the new law the Savings Investment Match Plan for Employees to make the acronym, SIMPLE.
It’s a special type of IRA and adopted because they’re easy to use. But they still have to be in compliance with many of the tax and ERISA provisions required of 401(k) and other qualified plans in order to continue to enjoy tax advantages.
It’s an especially current concern for those employers who have decided that a SIMPLE no longer fits, and will be replacing it in 2021 with a 401(k) plan. SIMPLEs must continue to be kept in compliance prior to termination, and plan document or operating mistakes should be corrected to preserve the tax advantages.
SIMPLEs haven’t always fared well in IRS audits with over 50% reported to have operational errors. Here are the 9 most frequent mistakes that the IRS has found need fixing.
1. The employer had more than 100 employees who earned at least $5,000 in compensation for the prior year.
2. The SIMPLE was not the only retirement plan that the employer sponsors.
3. The plan document was not amended for current law.
4. All eligible employees were not allowed to participate in the SIMPLE.
5. The employer did not administer the SIMPLE using the Plan definition of compensation.
6. Employer contributions were not correctly made to each participant’s account.
7. Contributions were not made to terminated participants who were eligible during the plan year.
8. All SIMPLE notification requirements were not satisfied.
9. Employee elective deferrals were not timely deposited.
The last error, of course, is a top enforcement priority of the Department of Labor (“DOL”). The DOL considers it a prohibited transaction for late deposits of employee contributions for which lost earning must be restored, and for which an employer or individual could be liable for a fiduciary breach.
The good news is that retirement plan mistakes can be corrected through IRS and DOL correction programs. It’s less expensive and less stressful to be proactive by correcting mistakes now rather than being reactive in an IRS audit or DOL investigation.
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