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Excess S.H. Match...where does it go?


Lori H

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Small SH 401K, member of an LLC maxed out his deferrals/match and after year end, it was determined that his compensation was below 401(a)17, which resulted in an excess SH match of under $1300.  Does this money go back to the plan sponsor or is it forfeited?  If it is forfeit/suspense account, how can it be used in the future as I am not sure if you can use that for future safe harbor match contributions.  Perhaps Profit Sharing?  Plan expenses? 

Thanks

 

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The excess does not go back to the employer.  The money plus earnings is placed in an unallocated account.  We use the money in the unallocated account to offset new safe harbor match contributions.  It's not difficult to offset, but often is a nuisance to stay on top of until used up.  This is a match by payroll. 

If once a year match, it will stay there until time to offset the yearly contribution. 

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Mr Bagwell is correct, it is placed in an unallocated account to be allocated at a later date.  You must allocate the funds prior to making any further contributions to the plan.  As long as it is an employer contribution, you can use it, so either match or PS would be fine. Since it is an unallocated account rather than forfeiture, you cannot use it for expenses.

 

 

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I disagree. In the OP, the excess SH match was deposited during the prior plan year. I don't see how it can be used for a future year's contribution. There is also the prefunding prohibition for matching contributions  in 1.401(m)-1(a)(2)(iii)(A).

 

Does the plan have a provision allowing the return of contributions made due to a mistake of fact?  

Based on the described situation, I would say the options are to use it towards the prior year PS contribution or return it under the mistake of fact provisions, if the plan has one.  

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EPCRS 6.06(2)

(2) Correction of Excess Allocations. In general, an Excess Allocation is corrected in accordance with the Reduction of Account Balance Correction Method set forth in this paragraph. Under this method, the account balance of an employee who received an Excess Allocation is reduced by the Excess Allocation (adjusted for Earnings). If the Excess Allocation would have been allocated to other employees in the year of the failure had the failure not occurred, then that amount (adjusted for Earnings) is reallocated to those employees in accordance with the plan’s allocation formula. If the improperly allocated amount would not have been allocated to other employees absent the failure, that amount (adjusted for Earnings) is placed in a separate account that is not allocated on behalf of any participant or beneficiary (an unallocated account) established for the purpose of holding Excess Allocations, adjusted for Earnings, to be used to reduce employer contributions (other than elective deferrals) in the current year or succeeding year. While such amounts remain in the unallocated account, the employer is not permitted to make contributions to the plan other than elective deferrals. Excess Allocations that are attributable to elective deferrals or after-tax employee contributions (adjusted for Earnings) must be distributed to the participant. For qualification purposes, an Excess Allocation that is corrected pursuant to this paragraph is disregarded for purposes of §§ 402(g) and 415, the actual deferral percentage test of § 401(k)(3), and the actual contribution percentage test of § 401(m)(2). If an Excess Allocation resulting from a violation of § 415 consists of annual additions attributable to both employer contributions and elective deferrals or after-tax employee contributions, then the correction of the Excess Allocation is completed by first distributing the unmatched employee’s after-tax contributions (adjusted for Earnings) and then the unmatched employee’s elective deferrals (adjusted for Earnings). If any excess remains, and is attributable to either elective deferrals or after-tax employee contributions that are matched, the excess is apportioned first to after-tax employee contributions with the associated matching employer contributions and then to elective deferrals with the associated matching employer contributions. Any matching contribution or nonelective employer contribution (adjusted for Earnings) which constitutes an Excess Allocation is then forfeited and placed in an unallocated account established for the purpose of holding Excess Allocations to be used to reduce employer contributions in the current year and succeeding year. Such unallocated account is adjusted for Earnings. While such amounts remain in the unallocated account, the employer is not permitted to make contributions (other than elective deferrals) to the plan.

 

 

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Quote

Rev. Proc. 2016-51, Section 6.02(2)(d) The correction method should not violate another applicable specific requirement of § 401(a) or  403(b) (for example, § 401(a)(4), 411(d)(6), or 403(b)(12), as applicable), 408(k) for SEPs, or  408(p) for SIMPLE IRA Plans, or a parallel requirement in Part 2 of Subtitle B of Title I of ERISA (for plans that are subject to Part 2 of Subtitle B of Title I of ERISA). If an additional failure is nevertheless created as a result of the use of a correction method in this revenue procedure, then that failure also must be corrected in conjunction with the use of that correction method and in accordance with the requirements of this revenue procedure.

We're going to have to agree to disagree.  

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2 hours ago, Kevin C said:

I disagree. In the OP, the excess SH match was deposited during the prior plan year. I don't see how it can be used for a future year's contribution. There is also the prefunding prohibition for matching contributions  in 1.401(m)-1(a)(2)(iii)(A).

 

Does the plan have a provision allowing the return of contributions made due to a mistake of fact?  

Based on the described situation, I would say the options are to use it towards the prior year PS contribution or return it under the mistake of fact provisions, if the plan has one.  

 Kevin,

Thanks for responding.  Yes the excess SH match was deposited in 2016 and it was determined in the current year that too much was deposited. The excess and allocable income has been determined.  If that amount gets moved to a non-forfeiture account, is that considered "prefunding"? 

We discussed "mistake of fact" as an option and perhaps it is our only option since the plan sponsor funded the PS today in order to fund prior to filing their tax return(tomorrow).  They(small medical office) normally wait til the last minute to get everyone involved the info we need. 

 

 

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The EOB says that contributions made because of an incorrect calculation of a participant's compensation are arguably included under the mistake of fact rules.  It also cites PLR 200639003 as a specific case where the IRS said contributions made due to an overstatement of earned income for partners were made as a result of a mistake of fact. 

Lori, the prefunding prohibition says:

Quote

 (A) General rule. Employer contributions are not matching contributions made on account of elective deferrals if they are contributed before the cash or deferred election is made or before the employees' performance of services with respect to which the elective deferrals are made (or when the cash that is subject to the cash or deferred elections would be currently available, if earlier). In addition, an employer contribution is not a matching contribution made on account of an employee contribution if it is contributed before the employee contribution.

I don't see how that would allow an amount deposited in 2016 to be used to fund a match based on services performed in 2017.

You could add it to the 2016 PS contribution.  I read what RBG quoted as saying you can't make additional contributions for 2016 while holding an excess amount to be used later. 

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