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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