correcting an excess Simple IRA contribution after Simple IRA rollover to 401k

Dear Sir/Madam,

I have a client who recently rolled money from his Simple IRA into his new 401(k) plan, effectively closing out his Simple IRA with a zero balance. Following that transaction, he received notice that he had an excess contribution into his Simple IRA plan during 2021.

I realize that one option would be for him to take a distribution from his 401(k) plan in the amount of the Simple IRA overcontribution plus associated taxes/penalties. Here are the questions:

1. Am I correct that, since he had the Simple IRA for longer than 2 years, he would have to pay a 10% tax penalty in addition to the amount of the overcontribution?

2. Am I correct that he would need to withdraw associated earnings on the contributions, if any?

3. Am I correct that, since he would be withdrawing the money prior to the tax filing due date plus extensions, that he would not need to pay a 6% excise tax?

Thanks in advance,

Chris



This is really a can of worms. How is the SIMPLE custodian reporting a corrective distribution? DId they issue revised 1099R forms for 2021? Such a 1099R would report distribution of the excess amount plus allocated earnings to the date of rollover. THe other 1099R would report the balance that was allowed to be rolled to the 401k.  Client would then have to report the the distribution of the excess and earnings as taxable income in 2021, and then advise the 401k plan that this portion was not eligible for rollover to the 401k. The 401k plan would then have to distribute the excess amount, but the excess should only be taxed one time and the penalty would be 10%. 25% only applies if this occurred in the first two years of SIMPLE IRA participation. In other words, the SIMPLE IRA Custodian should take the lead here  with revised 1099R forms, and client would not contact the 401k until this was resolved with the SIMPLE custodian.



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