Deferring before eligible

[Guest CGBS]

It happens every year. I have an employee who started deferring before attaining age 21. Is the current thinking that the PLAN should not refund the money to the participant, but rather that money should be "forfeited"? The plan is silent on ineligibles who defer.

If people are still refunding the money what IRS code should be used. Thanks for any help.

[Guest]

don't refer to it as a distribution. remember, if its a distribution certain rules apply - mandatory withholding, 10% early withdrawal, etc.

but the money should never have been in the plan in the first place, so its not a 'distribution'.

that is why it is suggested to correct the W-2 when the money is returned. It is money that should have shown on the w-2 to start with.

[M R Bernardin]

I think the current thinking on this is that you leave the deferrals in the plan, place them in a forfeiture/suspense account for future use, and make the participant whole outside of the plan by reimbursing them the amounts erroneously deferred. I would think you would also adjust the W-2 to show that nothing was deferred by this individual.

[rcline46]

I would think this is a classic 'mistake in fact' and returnable TO THE PAYROLL ACCOUNT. The employer then fixes the employee. I do not think it can be paid to the employee.

[Guest Powers]

I have the same situation except the ineligible deferrals are from 2007, but was forfeited in 2009. Do you correct the 2009 W-2 or do yo have to go back to 2007?

[Belgarath]

I think you could also go through VCP with a retroactive plan amendment to allow entry/deferral prior to age 21.

[Guest Powers]

VCP? oh no. I was hoping against that.

As it relates to making the participant whole, can the employer pay the employee (now a participant) the additional $150.00 and adjust the 2009 w-2 to reflect the $150.00 that was deferred in 2007? I feel like I am making this too difficult, but I can not find a cite or reference for support.

[Laura Harrington]

VCP? oh no. I was hoping against that.

As it relates to making the participant whole, can the employer pay the employee (now a participant) the additional $150.00 and adjust the 2009 w-2 to reflect the $150.00 that was deferred in 2007? I feel like I am making this too difficult, but I can not find a cite or reference for support.

You do not have to go through VCP in order to do a retroactive amendment to change eligibility. EPCRS provides for retroactive amendments to change eligibility in these situations through SCP. However, I believe you do have to submit the amendment for a determination letter.

Of course, SCP may not be available in your situation if the failure is significant and not corrected within the 2 year period. So then VCP would be the only option for a retroactive amendment.

[BG5150]

This is the only correction of early inclusion I found in EPCRS:

(3) Early Inclusion of Otherwise Eligible Employee Failure. (a) Plan Amendment

Correction Method. The Operational Failure of including an otherwise eligible employee

in the plan who either (i) has not completed the plan's minimum age or service

requirements, or (ii) has completed the plan's minimum age or service requirements but

became a participant in the plan on a date earlier than the applicable plan entry date, may

be corrected by using the plan amendment correction method set forth in this paragraph.

The plan is amended retroactively to change the eligibility or entry date provisions to

provide for the inclusion of the ineligible employee to reflect the plan's actual operations.

The amendment may change the eligibility or entry date provisions with respect to only

those ineligible employees that were wrongly included, and only to those ineligible

employees, provided (i) the amendment satisfies § 401(a) at the time it is adopted, (ii) the

amendment would have satisfied § 401(a) had the amendment been adopted at the

earlier time when it is effective, and (iii) the employees affected by the amendment are

predominantly nonhighly compensated employees.

(b) Example

Example 27:

Employer L maintains a § 401(k) plan applicable to all of its employees who have at least six

months of service. The plan is a calendar year plan. The plan provides that Employer L will make

matching contributions based upon an employee's salary reduction contributions. In 2007, it is

discovered that all four employees who were hired by Employer L in 2006 were permitted to make

salary reduction contributions to the plan effective with the first weekly paycheck after they were

employed. Three of the four employees are nonhighly compensated. Employer L matched these

employees' salary reduction contributions in accordance with the plan's matching contribution

formula. Employer L calculates the ADP and ACP tests for 2006 (taking into account the salary

reduction and matching contributions that were made for these employees) and determines that the

tests were satisfied.

Correction:

Employer L corrects the failure under SCP by adopting a plan amendment, effective for employees

hired on or after January 1, 2006, to provide that there is no service eligibility requirement under the

plan and submitting the amendment to the Service for a determination letter.

[Guest Sieve]

Remember that the corrections in EPCRS are safe-harbor correction methods, rather than mandatory correction methods. Other approaches may be acceptable.

[blue]

Search the Benefits Link Newsletter for Sungard's article "IRS Expands Correction Procedure to Permit Correction of 401(k) Excess Amounts" on August 10, 2009.

[Guest Powers]

Thank you all!!!