Jump to content

If Salary Deferrals are returned due to 415 limits what should happen


stephen
 Share

Recommended Posts

The document should specify how to handle the matching contribution.

As for your second question, there would be a discriminatory rate of match if the individual is a highly compensated employee. The basis being he has a rate of match greater than every non-highly compensated employee.

Link to comment
Share on other sites

and therefore the amount should be forfeited not distributed.

else I would defer $xxxxxxxxx bucks every year and get $xxxxxx in match, then collect it as a distribution due to 415 limit overage. No way is the IRS going to go for that.

Link to comment
Share on other sites

I would agree that forfeiture is most likely the option here, but I do not think it is mandatory that the document state that. If the person is a non-highly compensated employee, there is no discrimination. Also, the employer could have the option to increase other participants matching contributions if the person were highly compensated. Again though, forfeiture of the associated matching contributions is most likely what is required.

Link to comment
Share on other sites

I also agree document shouldn't matter.

my notes say

1.401(m)-1(e)(3)(vii) says to forfeit, but I will be honest and say I didn't look that up.

Link to comment
Share on other sites

correct, I forgot. I have been prepping some people in house for the C-2 test, was on the 401(k) section and I got forgot we were talking about 415 limit and not failed test.

my apologies.

Link to comment
Share on other sites

The IRS 401(k) exam guidelines (Announcement 94-101) specifically state that the match can not be forfeited or distributed: "There is no mechanism for either forfeiting or distributing this discriminatory matching contribution, but Reg. 1.401(a)(4)-11(g)(3)(vii)(B) provides athod of correcting discriminatory matching contributions (if the problem is discovered and can be corrected within 10 months after the end of the pan year)."

Has the Service changed its position on this?

r.

Link to comment
Share on other sites

Again my apologies for not reading the original intent of the question. amounts that exist in a plan due to 415 violations are covered under 1.415-6(B)(6)

(i)

themost common method, in a profit sharing plan where you siply reallocate to others, but since this involves match, this option would not seem to apply.

(ii)

reduce future allocations

(iii)

hold in suspense

Link to comment
Share on other sites

I agree with Mr. X's comments that there's not a discrimination problem if no HCEs are affected by the 415 reductions and that other correction mechanisms are available. The 1994 revisions to the 401(k) regulations were published in the Federal Register on 12/23/1994, almost certainly later in the calendar year than Announcement 94-101 that card refers to.

Here are the regulatory cites I referred to in my first post. While they don't expressly refer to match related to an excess annual addition, I believe the IRS would apply the same analysis.

Reg. 1.401(k)-1(f)(5)(iii):

"Matching contributions forfeited because of excess deferral or contribution. For purposes of section 401(k)(2)© and paragraph ©(1) of this section, a qualified matching contribution is not treated as forfeitable merely because under the plan it is forfeited if the contribution to which it relates is treated as an excess contribution, excess deferral, or excess aggregate contribution."

Reg. 1.401(m)-1(e)(3)(vii):

"No corrective distribution of matching contributions other than excess aggregate contributions. A matching contribution that is an excess aggregate contribution may be distributed as provided in section 401(m)(6) and 1.401(m)-1(e)(3). A matching contribution may not be distributed merely because the contribution to which it relates is treated as an excess contribution, excess deferral, or excess aggregate contribution. See §§1.401(k)-1(f)(5)(iii) and 1.411(a)-4(B)(7) regarding permissible forfeitures of matching contributions that relate to excess contributions, excess deferrals, or excess aggregate contributions."

This is from the preamble to the 1994 final regulations:

"Where a matching contribution relates to an excess deferral, an excess contribution, or an excess aggregate contribution that is distributed, a discriminatory rate of match may result, unless the matching contribution is distributed as an excess aggregate contribution. If the matching contribution cannot be distributed as an excess aggregate contribution, so that the discriminatory rate of match cannot be corrected by distribution, a plan may provide that the matching contributions are forfeited, as permitted by sections 411(a)(3)(G) and 401(k)(8)(E). See sections 1.401(k)-1(f)(5)(iii); 1.401(m)-1(e)(4); 1.411(a)-4(B)(7). Alternatively, the discriminatory rate of match can be corrected by additional allocations to the accounts of nonhighly compensated employees, under section 1.401(a)(4)-11(g)(3)(vii)(B)."

Link to comment
Share on other sites

I have three follow up comments:

1. MWEDDELL States:

"Here are the regulatory cites I referred to in my first post. While they don't expressly refer to match related to an excess annual addition, I believe the IRS would apply the same analysis."

He is referring to 1.401(k)-1(f)(5)(iii) and 1.401(m)-1(e)(3)(vii).

Could someone explain why the IRS would apply the same analysis to excess annual addtions returned?

2) Is there a discriminatory rate of match? (There have been several comments on this but no cites.)

3) Would everyone agree that there are no IRS cites that directly address: "If Salary Deferrals are returned to 415 limits what should happen to the matching contributions associated with the deferrals?"

Link to comment
Share on other sites

1. I agree, IRS would treat 415 different than 401(m). There is no reason to apply same rules.

2. Is there a discriminatory rate of match? I say yes.

check out the example in The ERISA Outline Book (page 5.33 of the 5th edition) it addresses this exact issue

I should have looked there in the first place!

basically, reallocate/hold in suspense/ or reduce future contributions.

3. is it addressed in the regs? well, the suggested correction above is one of the three methods found under 415

Link to comment
Share on other sites

"Would everyone agree that there are no IRS cites that directly address: 'If Salary Deferrals are returned to 415 limits what should happen to the matching contributions associated with the deferrals?'"

No. The IRS has specifically addressed this in Announcement 94-101, as cited above, and has stated that (1) the remaining match may be discriminatory and (2) the match allocable to the returned elective deferrals can not be distributed or forfeited.

I haven't seen anything cited that provides a contrary IRS position.

Link to comment
Share on other sites

The three examples of correcting a 415 violation in Tom's post are applicable, however, the plan may also distribute the elective deferrals ( 1.415-6(B)(6)(iv)). It would seem the original problem was the plan called for the distribution of elective deferrals first to correct a 415 violation, but not a correction of the associated match as described in one of the three methods in Tom's post. (This is poor document drafting, but a different story.)

Thus, if the participant is a highly compensated employee, there is now a discriminatory rate of match. This is the same issue as what would happen if a participant had excess contributions or excess deferrals. Therefore, it would make sense to treat it the same way, as MWeddell suggests. (Since she agreed with me, it only is fair to do likewise.)

Also, I didn't look up a cite for the discriminatory rate of match, but know that it is a benefit, right or feature and the info can be found in the 401(a)(4) regs.

Lastly, Stephen, are you sure that the document does not deal with the match in one of the three methods described in Tom's post? Really sure?

Link to comment
Share on other sites

Note also that there is a statutory basis for forfeiting a match that is attributable to an excess contribution, excess aggregate contribution, or excess deferral. See 401(k)(8)(E). There is no similar statutory authority for forfeiting a match on deferrals distributed to satisfy section 415.

card

Link to comment
Share on other sites

This discussion has indeed made me question my position. Great discussion!

The match is discriminatory if it stays in the plan. The same logic that's in the regulatory preamble applies. If the hanging match that remains after a 401(k) or 402(g) refund is discriminatory, the same reasoning applies if the hanging match is left after a 415 refund. The Announcement 94-101 provision cited by card concludes the same thing.

The difficulty is how to fix the problem. Distributing the money to employees is prohibited by law and doesn't fix the discrimination problem. It seems like our choices are to either forfeit the money without statutory or regulatory authority, arguing only by analogy to the cites quoted in my prior post or to allocate extra matching contributions to enough NHCEs to fix the discriminatory benefit, right, or feature as advocated by card. I still hold to the former position, but I'm much less sure of it based on this discussion. I have a hard time believing that one is required due to a reasonable error in estimating compensation etc. which caused a 415 excess to now allocate extra matching contributions to a large number of NHCEs.

Of course the forfeiture of a hanging match due to a 415 refund wasn't a widespread possibility before 1991, which helps explain why we don't have statutory authority for this refund.

Link to comment
Share on other sites

This is language I have used in 401(k) plans to provide the plan with maximum flexibility in case the IRS position changes:

"In lieu of establishing a suspense account and applying it as above described, the Plan Administrator may correct an excess Annual Addition on behalf of a Partici-pant for a Limitation Year by distributing to such Participant all or a portion of such Participant's After-Tax or Before-Tax Contributions for the Plan Year, or both, as necessary to correct such excess, in accordance with Treasury Regulation Section 1.415-6(B)(6)(iv). If After-Tax or Before-Tax Contributions are so distributed, there shall also be distributed any investment gains attributable thereto. Unmatched excess Annual Additions shall be distributed first, and then matched excess Annual Additions. If matched excess Annual Additions are distributed to a Highly Compensated Participant, then any Company Matching Contribution attributable to such excess Annual Addition, together with any allocable gains or losses, shall be distributed to the Participant if such Company Matching Contributions are excess contributions as a result of the application of the nondiscrimination rules of Section 4.8(B) and are vested under Article 5; otherwise they shall be forfeited to the extent permissible by law. If Company Matching Contributions attributable to such excess Annual Additions may not be forfeited, the Company and Plan Administrator shall take such other actions as necessary to ensure continued qualification of the Plan, including without limitation a corrective amendment pursuant to Treasury Regulation Section 1.401(a)(4)-11(g)(3)(vii)(B)."

card

Link to comment
Share on other sites

card:

actually, we need an al-gore-ithm to solve this one.

......

I agree with an earlier comment, the initial question has generated an excellent topic.

so where do we stand?

Based on the data, I think it was indicated that deferrals were returned. This created a discriminatory rate of match(?).

I believe all the notes agreed the match could not be distributed.

it certainly does not appear the match can be forfeited.

The ERISA Outline book comments:

comp = 45,000

415 limit = 11,250

deferrals = 10,000

match = 5,000

excess annual addition = 3,750

"Since all the deferrals are matched, the excess amount shound NOT be corrected entirely through the distribution of elective deferrals" (Emphasis mine, though if plan document says deferrals are returned first, you are out of luck)"Instead, the excess amount should be treated as a proportionate share of deferrals and match (2500 deferral and 1250 match) ...the 1250 match is corrected under one of the three methods described...

(under the 415 rules, as noted in prior notes above in this thread)

ah, thats it! there is no discrimination issue based on rate of match. ee was not entiltled to defer that much due to 415, so should not have gotten match in the first place. this is different than failing the adp test in which you were allowed to defer, then corrected and that created a discriminatory rate of match.

Link to comment
Share on other sites

Tom- GOOD ONE!

And I think you've hit on the answer. Allocate the excess between the deferral and the match, distribute the deferral, and use the 415 correction methods for the match. Don't just distribute the deferrals and create that darned "hanging match."

I would use the ERISA Outline Book more often if it didn't weigh 300 pounds.

card

Link to comment
Share on other sites

MrX-

You last post suggesting treating the match the same as it is treated with respect to excess deferrals, excess contributions, and excess aggregate contributions. This would mean either distributing the match or forfeiting it. But the IRS says neither of these is permissible.

Tom's approach, as reflected in the ERISA Outline Book takes a different approach. Treat the match itself as the 415 excess contribution. Therefore it becomes correctable under the 3 section 415 correction methods (reallocate, reduce future contributions, suspense account).

I do agree its a bit difficult to conceptualize why reallocating the contribution or using a suspense account isn't "forfeitng" the match. I think the answer is that here you have regulatory approval of the correction method. Whereas if you distributed only the elective deferrals to satisfy 415 you are left with the hanging match problem.

card

Link to comment
Share on other sites

I beg to differ. If the document called for the return of deferrals to correct a 415 violation, but not the associated match, I said that the discriminatory rate of match should be treated as with an excess deferral or excess contribution. But...

(Quote from previous post)

It would seem the original problem was the plan called for the distribution of elective deferrals first to correct a 415 violation, but not a correction of the associated match as described in one of the three methods in Tom's post. (This is poor document drafting, but a different story.)

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...