Employer overfunded SIMPLE IRA match for calendar year 2001 in 2001. Overfunding found out after employees filed 2001 income tax returns. I know excess must be withdrawn but not clear on several issues, specifically:

1. When excess returned who gets the money employee or employer?
2. Does the employee have to include excess contribution returned as income? If so what year 2001 or 2002? What form should this be reported on 1099R or W-2?
3. What are penalties for employee & employer?

The IRS has not issued any guidance on correction excess contributions made to SIMPLE IRAs. However, until the IRS issued guidance, the employer may treat the excess similarly to how an excess SEP contribution would be treated, i.e.
1- notify the employee of the excess contribution
1- amend the employee’s W-2 so that the excess is included in the compensation reported for the year the excess was made
1- the employee would then be required to notify the IRA custodian and instruct them to remove the excess



Another option is for the employer to leave the excess in the SIMPLE and treat it as a contribution for the following year. A 10 % excise penalty will be assessed and owed to the IRS. This option is given for SEPs in IRS publication 560, but it not given in the IRC… it would seem then that the IRS made an error in PUB 560.

Can excess be left in employee account if contributed in 2001 (for subsequent offset to 2002 employer contribution) with no income included on employee's 2001 return? Do employee's have penalties? Does employer have 10% penalty?

Please see above paragraph starting with “Another option is for the employer to leave …”

Borrowing from the SEP rules in Pub 560, it would appear that this is an option. No income ( from the excess contribution) would be included on the employee's 2001 return. Employees would not be assessed any penalty and the employer would owe the 10 % penalty.