SIMPLE IRA Match: When it’s decided, when it’s due, and what if it’s forgotten?

How and when does a company decide on a SIMPLE IRA match? What happens if they forget to contribute that match?       

In general, employer sponsoring a SIMIPLE IRA can make either:

  • a non-elective contribution of 2% to all employees (a contribution to all eligible employees whether or not they make salary deferrals into the plan, i.e. contribute from their own pay); OR
  • a dollar-for-dollar up to 3% of compensation match to those employee who make salary deferrals.

The 3 percent match may be reduced for a calendar year, but only when all three conditions are met:

  • The match is at least 1 percent; AND
  • Match reduction happens no more than in 2 calendar years out of the 5-year period ending with, and including, the calendar year in which the reduction is effective; AND
  • Employees are notified of the reduced match before the annual 60-day election period for employee salary deferral decisions which starts on November 2.

Match decision needs to be made and communicated to eligible employees prior to the employee election period, typically 60 days before January 1.

Employer contribution needs to be deposited to participant accounts no later than the business’ tax filing deadline, including extensions. If the employer fails to make a timely contribution, the cure can get expensive:

First, employer needs to make a corrective contribution to place affected employees in the position they would have been had the deposit been made timely. That basically means that the company now needs to deposit contribution PLUS earnings employees would have realized had the deposits been made on time. The Department of Labor has a special online calculator that helps determine amount of earnings.

The second part of the correction will depend on how the issue is discovered.

1) If the error is discovered on audit, the IRS will likely apply special sanctions ( i.e. penalty to employer) as a part of its Closing Agreement Program (CAP); amount of penalty will vary on severity of the issue, number of affected participants, dollars involved, and other factors deemed pertinent by the IRS.

2) If the failure is self-identified and is deemed to be insignificant (e.g. only a small percent of employees is effected, amount involved is low, and the issue was caught early), then the employer may be able to self-correct. Some violations may have to be submitted to IRS via its Voluntary Compliance program (special user fee and professional fees will apply).

A consultation with a knowledgeable retirement plan professional is always encouraged whenever a deposit failure is identified.