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, SIMPLE IRAs are not always simple. Perpetually changing retirement plan laws, can and do cause mistakes to occur.
How to Correct Mistakes
SIMPLE IRA operating mistakes can be corrected through the IRS’s Employee Plans Compliance Resolution System (EPCRS). The EPCRS has three correction programs available:
1. Self-correction Program (SCP)
The SCP is available for correcting insignificant operational mistakes only. IRS Revenue Procedure 2008-50, 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 isn’t sufficient proof of established practices and procedures. The SCP has no fee, and plan sponsors don’t have to notify the IRS of the mistake.
2. 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 Forms 8950, “Application for Voluntary Correction Program,” and 8951, “Compliance Fee for Application for Voluntary Correction Program,” and 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 won’t 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.
3. 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.
Useful Information to Prevent Potential Mistakes
Plan sponsors should periodically review current SIMPLE IRA laws and rules. The IRS has a SIMPLE IRA checklist and the IRS SIMPLE IRA Plan Fix-it Guide. Both the checklist and fix-it guide, as well as more information on the correction methods, can be found at http://www.irs.gov/Retirement-Plans/Correcting-Plan-Errors.