Simple Plan error

[Cris]

Hello all,

I am wondering if anyone has knowledge of how to correct an error made is a client's Simple Plan. The plan allows the employees to choose the financial institution. One employee did not like the broker for the plan and chose to have his account transfered to another broker. He was told they would open a Simple account. The broker was supplied with all the correct info but did open a Simple. The funds were placed in a traditional IRA. Once the contributions exceed the IRA limit, the broker returned the checks uncashed (they held onto them for quite awhile).

The original broker was able to re-open the employee's account and the new broker may be able to send back the transferred funds. However, the original broker states that they cannot receive the deferrals made since the funds were transfered (some occured in 2004. some 2005). The new broker has also returned the companies matching contribution. The original broker can't take those funds because they didn't have the deferrals that the match is based on.

Does anyone know how this error can be corrected? Should the employee take a distribution and live with the tax and penalty?

By the way, the corporate tax return has already been filed claiming the matched funds.

Thanks to anyone who might have a suggestion.

[Bees Knees]

Somebody has to accept the payments as SIMPLE contributions, or you have a lot of amending to do. Worst case scenario; you go back and recalculate all the SIMPLE payments the broker did accept, have the employer’s contribution figured into that amount, and amend the tax returns as if that was the amount the employee chose to contribute. At least with a SIMPLE, employees have the freedom to choose the amount each year, so the plan is not disqualified for contributing too little.

But I would think since this is the fault of the original broker, they should re-do their paper work to reflect that they did in fact accept the SIMPLE contributions when made. Make them show the money held in an account paying zero interest. They can call the account anything they want, but they did accept the money and held on to the funds for a period of time.

This is also a lesson as to why you always follow up whenever money is contributed to an IRA or SEP or SIMPLE. Make sure you get a confirmation of the contribution soon after the contribution. And make sure the confirmation shows it as being made to the correct type of retirement plan. If you do not get a confirmation, start making calls.