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Tuesday, March 22, 2022

Email Consulting Guidance – Excess Deferrals to SIMPLE-IRAs. Who is Primarily Responsible to Correct?

Email Consulting Guidance – Excess Deferrals to SIMPLE-IRAs. Who is Primarily Responsible to Correct?

Posted by James M. Carlson
January 2022

Q-1. We have a SIMPLE IRA that contributed 16 cents more than allowed in 2021. Do we have to distribute the 16 cents and issue a 1099R on such a small amount?

A-1. Will the individual have other distributions in 2022?

If not, he may withdraw the amount as an excess contribution. Remember the rule is - a Form 1099-R needs to be prepared only if the annual distribution amount is $10 or more.

You would have to determine if you can instruct your system not to prepare the Form 1099-R. Or, you could decide to code the withdrawal as transfer so that the Form 1099-R would not be prepared.

Q-1A. What about the 5498 report and his w2? They will both show an excess contribution. Do we still send the 5498 with that on it?

A-1B. Is he withdrawing the 16 cents? If he does , there no longer is an excess .

The excess deferral was made so there is no right to change his Form 5498.

As for his W-2 form, the tax accountant and the employer must decide what is to be done. I presume his W-2 would report the corrected deferral amount and it would not include the 16 cents. His income might go up by 16 cents????

In my opinion, the 16 cents just is not material.

Q-1B. I thought you said he will withdraw it but I guess an excess contribution requires something more?

A-1B. A SIMPLE-IRA excess contribution situation is very different from an excess traditional IRA or SEP excess contribution situation.

When a mistake occurs and an employee contributes/defers more than the law permits this can impact the employer’s preparation of the person’s Form W-2. This is the job of the accountant or the payroll company.

For 16 cents I personally would take the position the employer need not modify the Form W-2 as it is not material.

Q-1C. The month we receive the contribution is the month the IRS uses to add up the total contribution in a year, correct? i.e. December 2020 withholding was contributed in January 2021. So it is a 2021 contribution and not 2020.

A-1C. A good question and you are right - the amount to be reported in box 9 (SIMPLE-IRA contributions) is based on the year the bank receives the contribution. The bank does not indicate on the Form 5498 for what tax year the contribution relates. The employer and the employee do this on their tax returns.

I don’t see the IRS calculating or trying to calculate if a person has exceeded the SIMPLE-IRA elective deferral limits for 2021 or for any year. You are concerned that the IRS monitors this limit and then contacts someone. I don’t think the IRS does. I don’t think the IRS computer systems are designed to monitor this limit. Why?

The amount reported in box 9 is the aggregate of two amounts; a participant’s elective deferral amount plus the employer contribution which is either a match with a limit of 1-3% of compensation or the 2% non-elective contribution. There is no way for the IRS to know whether the employer contribution amount is correct or incorrect or whether an employee has exceeded the applicable deferral limit unless an audit of the employer or the employee is conducted.

Posted by James M. Carlson at 14:57.28
Categories: Email Guidance