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Retirement Plan CPA discusses IRS report on SIMPLE IRA plan failures | Form 5304 and Form 5305

Retirement plan CPA in Wilmington NC discusses SIMPLE IRA errors.

Gary Bode CPA: choose the best retirement plan for your company and then administer it to IRS requirements. For a free consult call (910) 399-2705.

An IRS announcement in June 2012 described common SIMPLE IRA plan failures found during an eight year study. Moral of the study- run your company’s SIMPLE IRA plan to IRS requirements or risk losing all tax benefits to date. I doubt any retirement CPA was surprised. What did the IRS find? Everything.

Consequences if your SIMPLE IRA plan operates outside of IRS parameters?

You’d want to correct it. The IRS seems more interested in future compliance than retroactive punishment. It probably depends on the specific circumstances and underlying intent. BUT, the plan could be ineligible for salary deferrals and the employer plan contributions will be non-deductible. Consequences could be retroactive for several years resulting in a large tax bill and penalties.


I cut and pasted the IRS checklist for SIMPLE IRA plans below. It’s a good way to determine if you’re in compliance.

The IRS has a voluntary correctional program. Some errors can be easily fixed, without notifying the IRS. If you have problems understanding the correctional program, or don’t have a local retirement plan CPA, consider calling us for a free phone consult: (910) 399-2705. Our virtual office serves you even if your company is outside our Wilmington NC geographical base.

SIMPLE IRA plan errors

The study and report don’t mention fraud. But of course some errors favor the owners and their families. Here are  some examples of what the IRS study found:


  • More than 100 employees.
  • Had another pension plan in place.

Eligibility Issues

  • Excluded eligible employees.
  • Included ineligible private contractors.

Contribution Issues

  • Companies didn’t contribute the required matching funds.
  • Didn’t match the percentage to all employees.

Deposit Issues

  • Failure to deposit SIMPLE IRA funds on time.

Here’s the IRS check list for SIMPLE IRA plans

This helps you find flaws in your SIMPLE IRA plan. Again, most retirement plan CPAs would start with these basics. If you answer no to any question, you might have a problem.

1. Has your SIMPLE IRA plan been amended for current law?

Laws related to retirement plans change quite frequently. You need to change plan language and operation to keep the plan within the law.

2. Do you have 100 or fewer employees who earned at least $5,000 in compensation for the prior year?

Businesses with more than 100 employees (including full-time, part-time, and seasonal employees) with individual earnings of at least $5,000 yearly cannot establish a SIMPLE IRA plan.

3. Does your business only sponsor this SIMPLE IRA plan?

A business with a SIMPLE IRA plan generally cannot sponsor any other retirement plan, such as a 401(k) plan.

4. Are all eligible employees allowed to participate in the SIMPLE IRA plan?

An employee who had compensation of at least $5,000 in any 2 prior years and who is expected to earn at least $5,000 in the current year is eligible to participate in a SIMPLE IRA plan.

5. Are you determining each eligible employee’s compensation using the definition in your SIMPLE IRA plan document?

Generally, compensation means the sum of wages, tips and other compensation subject to federal income tax withholding and the employee’s salary deferral contributions made to the SIMPLE IRA plan. (More)

6. Are correct contributions being timely made to each participant’s SIMPLE IRA?

The required employer contribution must be either 2% of an employee’s compensation or up to a 3% matching contribution. You must deposit employees’ deferrals in the IRA as soon as possible, but no later than 30 days following the month in which the employee would have otherwise received the money.

7. Are contributions being made to terminated participants who were eligible during the plan year?

A SIMPLE IRA plan cannot require employment on a particular day, such as the last day of the year, in order to receive matching or nonelec­tive contributions.

8. Have all SIMPLE IRA plan notification requirements been satisfied?

Requirements include providing employees with the opportunity to make a salary deferral election, informing employees of the ability to select a financial institution for their SIMPLE IRAs, providing employees with a summary plan description and notifying employees of the employer’s decision whether to make matching or nonelective contributions.

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