How to Fix a SIMPLE Mistake
Savings Incentive Match Plans for Employees (SIMPLE) IRAs offer small employers and their employees a simplified way to save for retirement. Generally, these plans allow employers and employees to contribute to traditional IRAs set up for employees. However, most plan sponsors will tell you that operating SIMPLE IRAs is not always simple. Because of ever-changing retirement plan laws, mistakes can occur.
Mistakes happen, so knowing how to correct a mistake can greatly minimize the headaches a plan sponsor may encounter when overseeing a SIMPLE IRA Plan. Plan sponsors can correct many SIMPLE IRA operating mistakes through the IRS’s Employee Plans Compliance Resolution System (EPCRS). The EPCRS has three correction programs available to SIMPLE IRA plans:
- Self-Correction Program (SCP) The SCP is available for correcting insignificant operational mistakes only. Plan sponsors can refer to IRS Revenue Procedure 2008-50, which includes a list of facts and circumstances to consider when determining the significance of a mistake. To use the SCP, plan sponsors must have either formal or informal practices and procedures in place promoting overall compliance with the law. According to the IRS, a plan document alone is not sufficient proof of established practices and procedures. The SCP has no fee, and plan sponsors do not have to notify the IRS of the mistake.
- Voluntary Correction Program (VCP) The VCP is available for both significant and insignificant mistakes. This method allows a plan sponsor to pay a $250 fee and receive IRS approval for the correction of a plan failure. The plan sponsor must submit completed Form 8950, “Application for Voluntary Correction Program,” and Form 8951, “Compliance Fee for Application for Voluntary Correction Program,” as well as provide information regarding the mistake itself, how the sponsor will correct the mistake and the necessary procedural changes the plan sponsor has made to ensure that the mistake will not occur again. The IRS will issue a compliance statement detailing the mistake and an approved correction method. The plan sponsor must then correct the mistake within 150 days from the issuance date of the compliance statement.
- Audit Closing Agreement Program (Audit CAP) When a plan mistake is identified during an audit, plan sponsors use the Audit CAP to correct it. The plan sponsor makes the necessary corrections, enters into a closing agreement with the IRS and pays a negotiated sanction.
Use Knowledge to Avoid Mistakes
To avoid mistakes, plan sponsors should periodically review current SIMPLE IRA laws and rules and seek professional guidance when needed. If you need any assistance or guidance regarding your SIMPLE IRA, please do not hesitate to contact Jim Pellino at [email protected] or call him 312.670.7444.