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Some Participants Didn't Get Allocation of Profit Sharing Contribution


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Hello -

A 401(k)/Profit Sharing Plan has made a number of profit sharing contributions over the years.  Unfortunately, it was recently discovered that several eligible employees were not given a profit sharing contribution. The sponsor is now deciding between VCP vs. SCP under EPCRS based on recommendations provided.  (1).  What do you call these missed contributions (plus earnings) once made?  Are they QNECs?  (2) Are these missed contributions 100% vested once deposited into the plan?  I assume so, if they are QNECs.

Thank you for your time.

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It sounds like you are correcting missed Employer Discretionary Contributions. If so, these aren't QNECs.  To me they are simply a correction.  I would subject the corrected amounts to the vesting schedule.  The point of any correction method is to get a person back to where they are no better or worse off had the mistake not been made.  To give them more vesting could make them better off then if the mistake wasn't made. 

What I just described is how we do it any time we do this type of correction and when done via VCP it has always been blessed by the IRS.

As for VCP or SCP it depends on how many people and how many years.  I forget the exact words the SCP rules use but the error can't be significant and frequent.  So if it a large group of people or over many years I would lean towards a VCP.  In the end I would get an ERISA attorney's opinion unless it was just 1 or 2 people over 1 or 2 years. 

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Thanks so much.  What about if instead the facts were a missed matching contribution spread over a couple of years.  You have to provide 100% of the matching contribution plus earnings.  You treat this the same way?  Subject to a vesting schedule?  If it was instead a ACP correction without refunds, then that is a 100% vested QMAC?

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It has been much longer since I worked on 4k plans but I don't see this correction as a QMAC.  I see it as simply a correction and I would subject the correction amounts to vesting. 

Once again the guiding principle to SPC and VCP corrections are to make the person be the same as they would have been if no error had been made.

This isn't the same thinking with ADP or ACP failures.  In those cases you have a choice at least at first to refund or add money to get the ratios to work.  If you think about the refund option would get the people back (or at least it used to before they made the rule about refunding the person who deferred the most instead of having the highest ratio) where they would have been if no error had been made. 

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Agree with what ESOP Guy is saying. Have done these or similar many times over the years. You simply go back to each year with the error and ask, "What would this person have received if we had done it right, and when," and then give them that in the account, plus earnings forward from the date when they would have gotten it. (Note that if you have a comp to comp allocation method, you need to give them the percentage that the other folks got, not the lower percentage that everyone would have received if you had included these folks in the comp to comp allocation.) The vesting schedule would apply if they are not still employed. If the error does not go back before 2015, you are good to self-correct no matter how many participants are involved or amounts, under the "two plan year" rule for self-correction of significant errors. If go back to 2014 or earlier, then need to do VCP unless the error was "insignificant" (e.g., just a handful of individuals, e.g., less than 2 to 5 % of plan participants, less than 2 to 5% of contributions, different participants different years, etc., although 5% may be viewed as aggressive).

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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