QRP - qualified replacement plan related

[Jakyasar]

Hi

A client who uses their DC plan as a QRP made a big booboo last year which I just found out.

For 2021, they used 65k of the QRP as mandated (1/7th) and allocated from the suspense account to the individual account in 2022. No problem for 2021.

However, unbeknownst to me, later in 2022, the client deposited 60k in their account (owner only) by mistake, it was not intended as they are fully aware of the QRP requirements.

For 2022, according to the suspense account balance and 1/6th rule, they need to use 60k of the QRP.

Given that this is 3 person pension plan, is there a way to correct this i.e. client refunds the deposit made in error during 2022 with interest adjustment back to the biz account? I do not see how but......

Otherwise, as the owner is almost at 415c limit, the 60k pretty much will have to be allocated to the 2 rank&file employees (both make 50k in salary and unfortunately one of them is the spouse of the owner aka HCE).

I have never seen this before in all my dealings with QRP and wanted to ask if there is a way to correct this, something I may have missed?

Thank you

[Lou S.]

I'm not sure I see something that is correctable because it doesn't look like the plan will have a "failure" if you allocate the $60 K contribution plus the $60K reallocation from the QRP, it is just that the NHCE is likely to get a windfall.

Just to throw out some numbers with the following assumptions with prorata allocation capped at 415.

Owner pay $305,000 - allocation $61,000 (20%)

Wife HCE pay $50,000 - allocation $29,500 (59%)

NHCE pay $50,000 - allocation $29,500 (59%)

You don't violate 415, you don't have a deduction issue, you don't have a discrimination issue.

I realize it's not ideal giving the NHCE a 59% of pay allocation but my guess is on an audit that might not be far from what the IRS would be looking for.

I don't know maybe the if the wife and owner are older than the NHCE and the plan has everyone in their own rate group you can skew more of the allocation to the wife but that would depend on demographics and plan terms.