Fixing common plan mistakes - SIMPLE IRA sponsor with a related business

SIMPLE IRA plans are a great choice for a small business. SIMPLE IRA features include:

A SIMPLE IRA plan must cover every employee who earned at least $5,000 in any two previous years. Also, only an employer with 100 or fewer employees may sponsor a SIMPLE IRA plan.

The problem

SIMPLE IRA plan rules can get complicated if you or your spouse are involved in more than one business. If your business is part of a controlled group or affiliated service group, the law considers the employees of the other business your employees and you must include them in your SIMPLE IRA plan.

Generally, you may need to include employees of another business in your SIMPLE IRA plan if you:

The rules for determining control and affiliation are detailed and you should consult your tax professional if you believe they may apply. Below are a few examples of when the employees of another business must be included in your SIMPLE IRA plan.

Example: You own 100% of Business A, which sponsors a SIMPLE IRA plan for its employees. The employees of Business B are also considered your employees, and must be included in the SIMPLE IRA plan, in the following situations:

Your spouse’s business ownership is attributed to you unless you meet all of the following:

  1. You do not own any direct interest in your spouse’s business,
  2. You do not participate in your spouse’s business as a director, fiduciary, officer, employee, and do not manage the business any time during the year
  3. Your spouse’s business’ income is not 50% or more passive income (rent, dividends)
  4. Your spouse’s ownership interest is not restricted to favor you or your minor children

Failures that result when you have related businesses

Overlooking the employees of your related business can cause several plan failures:

  1. Employer ineligibility to sponsor a SIMPLE IRA plan occurs when:
  2. Exclusion of employees of related businesses from participating in the plan; or
  3. Inclusion of ineligible employees can occur if you previously included employees of a related business in your plan but that business is no longer part of your controlled group.

Fixing errors in a SIMPLE IRA Plan

These failures can result in the loss of tax benefits for both the employer and employees. To correct these failures, make a submission to the IRS’s Voluntary Correction Program (VCP) via the Pay.gov website following the instructions set forth in Revenue Procedure 2021-30, Section 11.

The IRS has special forms for SIMPLE IRA plan sponsors to report common plan failures. Use Form 14568, Model VCP Compliance Statement PDF and Form 14568-D, Model VCP Compliance Statement-Schedule 4 SIMPLE IRA PDF . Form 14568-D is specifically designed to allow sponsors of IRA-based plans to correct failures relating to:

  1. plan sponsor ineligibility,
  2. failure to make required employer contributions,
  3. failure to provide employees the opportunity to make deferrals, or
  4. contributing excess amounts to the plan.

Check the boxes for your specific failures and follow the instructions for the correction method.

Standard correction methods for SIMPLE IRA plan failures

If the employer chooses to use Form 14568-D they must use these standard correction methods to correct a failure in the Voluntary Correction Program:

You may be ineligible to sponsor a SIMPLE IRA plan if the combined number of employees (who earned $5,000 or more during the preceding calendar year) in your related businesses exceeds 100. In most cases, a grace period of two calendar years will apply before you are considered ineligible.

Example: In 2011, the number of employees (who earned $5,000 or more during the preceding calendar year) in your controlled group exceeded 100 for the first time. In 2012 and 2013, you continued to have over 100 employees. You became an ineligible employer in 2014.

To correct this failure, you must stop all contributions to the SIMPLE IRA plan for 2014. Your VCP submission must state the date that contributions stopped. It is not necessary to distribute amounts you contributed to the plan in 2012 and 2013.

If you erroneously excluded employees who were eligible to participate in the SIMPLE IRA plan, you must contribute additional amounts to the plan for each excluded employee. For employees of related businesses who were entirely excluded from the plan, the contribution will equal:

Contributions must include earnings that the excluded employee would have received and these must be calculated up to the date the corrective contribution is made.

Eligible employees are those employees who earned $5,000 or more in any 2 prior years, regardless of their age or hours of service.

If an affected employee does not have a SIMPLE IRA account, set up an account for that employee.

  1. Inclusion of ineligible employees

It’s possible to have a SIMPLE IRA plan failure by including employees that shouldn’t have been in your plan. If you previously included employees of a related business in your SIMPLE IRA plan, but that business is now no longer part of your controlled group, you may have a failure.

To correct the failure, the excess amounts should be distributed from the plan. The ineligible employees should be informed that:

Employer contributions, adjusted for earnings through the date of correction:

The amount returned is reported on Form 1099-R as a distribution issued to the affected participant, indicating the taxable amount as zero.

Making sure it doesn’t happen again

In a controlled group, ensure that your payroll system has proper internal controls to properly apply the plan provisions. For example, if each related business determines eligibility for plan participation, they may have different interpretations of who is and who is not eligible. Finally, if you are unsure how your business is affected by the rules for controlled and affiliated service groups, consult your tax professional.

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