Best Method for Return of Simple IRA Excess Contribution

We have an employee who received an excess contribution to Simple IRA in

2007. I want to know the most straightforward way to remove the excess contribution, pay the excess as ordinary income, and then have the employee reconcile the transactions on their returns. I understand that we need to correct this all before tax filing deadline so the employee can correctly declare overcontribution on the return.

If we have the IRA administrator return the overcontribution, any income earned on it, and the employer contribution to *the company* rather than to the employee, and then if the company turns around and issues a special one time payroll to the employee in the amount of the overcontribution, would that be a reasonable way to handle situation? It has the advantage for the company of allowing the payment of the overcontribution amount through the payroll service, and employer contribution to FICA etc get removed appropriately, reporting is done on the amount, etc. But the special one time salary ends up being part of 2008 income rather than 2007 income, so what special declarations are required for the employer on the 2007 tax return? What we want to avoid at all costs is a need to refile 2007 federal and state filings and employee W-2s.

From employee's point of view, what entries does that person need to make on

their personal return for 2007 to correctly back out the overcontribution and move it forward to 2008 income?

If this isn't the correct procedure, then of course I want to know what is the right way to do the transactions.

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Will
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