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Help on ineligible deferrals


Tostevino

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Newbie here, hoping for some help on ineligible deferrals. Our company issued ineligible deferral refunds this year. The explanation we were given is that "one or more plan participants made ineligible ROTH salary deferrals under the profit sharing plan." Refund checks issued April 13, 2017.

Our company is owned by two individuals. Both are at least age 62, for what that's worth. 

The majority of our employees do not participate in the plan. The few rank and file employees who do participate received checks for matching contributions. The 402(g) violation return summary shows a few different numbers: excess deferrals, gain on excess deferrals, return of gap period interest; total amount return gain; and total amount to be paid.

Might anyone be able to advise on what likely happened here? Is this an HCE type violation? Or could it be from not matching by the safe harbor deadline?

Thank you.

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yes, there is a type of "HCE violation" that might exist. I will try my best to explain it in simple terms.

for better or worse, there is a regulation that says the HCEs can not defer (on the average) a greater % than the NHCEs. so, for example if the NHCEs defer on the average 2% or more the HCEs are permitted (on the average)  to defer and additional 2% on top of that. so if you have 20 NHCEs and on the average they deferred 3.0% the HCEs could defer 5%. (If you had 2 HCEs and on deferred 10% and the other 0% that would be an average of 5% and would be ok. any thing above that % would be considered an excess, and therefore be returned. but the amount of return is based on who defer the most $ rather than the greatest %, just to complicate things.

since you indicated few of the NHCEs defer, it sounds like that is what is going on, but your note says 'ineligible ROTH deferrals' is somewhat confusing to me, as that almost sounds like ROTH deferrals are not permitted (hence ineligible) rather than due to a test failure, but maybe that is simply the verbiage they are using to describe a test failure.

If there is a value under 'return of gap period interest' I would be extremely surprised. I guess a document could still require that, but that is something the regulations no longer require.

 

hope that helps for starters

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