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How to Fix Under-Contributions in a SIMPLE IRA

If your business has contributed less to your employees’ SIMPLE IRAs than required, it’s essential to take corrective action as soon as possible to avoid penalties and ensure compliance with IRS regulations. Under-contributions can occur for various reasons, such as miscalculating contribution amounts or missing deadlines.

Steps to Fix Under-Contributions

Generate the True-Up Report

To confirm if an over-contribution has occurred, generate a True-Up Report from the Reports Section in WealthRabbit. This report will compare your actual contributions against the amounts required by your SIMPLE IRA plan rules, highlighting any over-contributions.

Make Up the Missing Contributions

Once you've identified the under-contribution, you must contribute the shortfall (the difference between what you should have contributed and what you actually contributed), along with earnings that would have accrued from the date the contributions should have been made until the date of correction.

• Example:
  If the required contribution for an employee was $1,500, but you only contributed $1,200, you need to contribute the missing $300 along with any interest or earnings that the $300 would have accrued if it had been deposited on time.

Contribute Earnings on Late Contributions
If you didn’t make the employer contribution on time, you will need to make an additional contribution to cover the earnings that the missed contributions would have earned.
 

• Example:
  If the contribution was due in January, but you didn’t make it until March, you need to calculate the earnings the $300 would have made in those two months and contribute that amount as well.

Use a Reasonable Rate of Interest (if actual earnings can’t be determined)
If it’s not feasible to determine the actual investment results or earnings for the missed contributions, you may use a reasonable rate of interest. A standard rate is provided by the Department of Labor’s Voluntary Fiduciary Correction Program (VFCP) Online Calculator, which can be used to calculate reasonable interest rates for missed contributions.
 

• Example:
  If you cannot determine the exact earnings, use the rate provided by the VFCP calculator to estimate the interest on the missing contribution.

IRS Correction Program

If you're dealing with excess contributions, the IRS has set up a couple of correction programs to help you fix the error. These programs vary depending on the size and nature of the error.

1. Self-Correction Program (SCP):
   The SCP allows you to correct certain mistakes on your own without notifying the IRS. This is available if the mistake is insignificant, meaning the error doesn’t result in a significant tax issue or penalty.

2. Voluntary Correction Program (VCP):
   The VCP requires you to submit a correction request to the IRS for approval. This is typically used for larger errors or when you want formal approval from the IRS. If you're using the Retention Method or if the mistake is significant, you must submit a VCP application. There’s a fee for submitting under VCP, and the correction must be approved by the IRS.

3. Audit Closing Agreement Program (Audit CAP):
   If the IRS is already auditing your SIMPLE IRA plan and finds an over-contribution, you’ll need to correct the issue through the Audit CAP. This program allows you to reach an agreement with the IRS to resolve the mistake, but it typically involves paying penalties and additional fees. Learn More About IRS Correction Programs