Since the contribution was made by the individual to a SIMPLE IRA it is an excess contrbution and should have been removed before the due date (adj for gain/loss) of the Federal return to avoid double taxation (if paid after that date). The 6% penalty tax does not apply to a Simple IRA. Employer contributions can not be recharacterized. Rollovers from a traditional IRA to a SIMPLE IRA can be recharacterized.
I do not believe that the excess contribution that were made from personal funds of the owner can be recarachterized. Publication 590, page 26, states:
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Traditional IRA mistakenly moved to SIMPLE IRA. If you mistakenly roll over or transfer an amount from a traditional IRA to a SIMPLE IRA, you can later recharacterize the amount as a contribution to another traditional IRA.
Recharacterizing excess contributions. You can recharacterize only actual contributions. If you are applying excess contributions for prior years as current contributions, you can recharacterize them only if the recharacterization would still be timely with respect to the tax year for which the applied contributions were actually made.
Example. You contributed more than you were entitled to in 2004. You cannot recharacterize the excess contributions you made in 2004 after April 15, 2005, because contributions after that date are no longer timely for 2004.
Recharcterizing Employer Contributions. You cannot recharacterize employer contributions (including elective deferrals) under a SEP or SIMPLE plan as contributions to another IRA. SEPs are discussed in Publication 560. SIMPLE plans are discussed in chapter 3.
Recharacterization not counted as rollover. The recharacterization of a contribution is not treated as a rollover for purposes of the 1-year waiting period described earlier in this chapter under Rollover From One IRA Into Another. This is true even if the contribution would have been treated as a rollover contribution by the second IRA if it had been made directly to the second IRA rather than as a result of a recharacterization of a contribution to the first IRA.