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A plan moved from a 3% nonelective safe harbor prior to 2019 to a basic safe harbor match for 2019.  Through some miscommunication with payroll they continued to allocate a 3% nonelective during 2019, so some participants received too much safe harbor and some not enough.  The net effect is an overcontribution to the Plan as the participants who received too much exceeded the participants that need more.

There are two participants who received too much who took distributions before the error was realized.  One took a distribution in 2019 and one in 2020.

The amounts are not huge, $500 for the 2019 distribution and $1500 for the 2020 distribution.  

Since the plan sponsor already has an excess in the Plan they would like to use some of the excess to treat the ineligible distributions as non-recoverable from the participants.

Am I correct, however, that in both cases the participants need to be informed that the ineligible portion of their distributions were not eligible for rollover and must contact their new custodians to distribute the ineligible amount plus earnings, corrected 1099s will need to be completed, and in the case of the 2019 distribution, the participant will most likely need to amend their tax return?

I was trying to think of a way in which the contributions could be considered as actual contributions for these two non-highly compensated employees to avoid further correction.  The Plan does allow for profit sharing in which each ee is their own allocation class, but also requires last day of employment (which disqualifies the 2019 distribution ee), and the 2020 distribution ee would not be fully vested in profit sharing.

Thank you.

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2 hours ago, Gilmore said:

I was trying to think of a way in which the contributions could be considered as actual contributions for these two non-highly compensated employees to avoid further correction.  The Plan does allow for profit sharing in which each ee is their own allocation class, but also requires last day of employment (which disqualifies the 2019 distribution ee), and the 2020 distribution ee would not be fully vested in profit sharing.

Adopt an -11(g) amendment waiving the last day requirement for the 2019 employee, and a mid-year amendment waiving the last day requirement and granting additional vesting for the 2020 employee.

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Thanks CB.  Would the 11g amendment work if these were the only two that received the "profit sharing" contribution.  In other words, everyone else with an overage would have their overage forfeited but these two who were inadvertently paid out.  The errors involving these two allow for the use of the 11g amendment, which is permitted because they are both non-HCE?

Thanks.

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