Ineligible deferrals

[Guest]

Scenario:

Employee ineligible to participate in a 401(k)plan defers $700.00 for the year. This is a daily valued plan, but we did not update eligibility until after year end. To correct this, I think we should sell shares purchased from the employee's account and instruct the ER to reduce a future deposit by the $700.00. This would be assuming the proceeds from the sale are at least $700.00. If the proceeds are more than $700.00, then I would allocate the gain accross participant balances. If there is a loss, I would instruct the ER to only reduce a future deposit by the proceeds of the sale. Some in my office believe that the ER should be able to use the gain to offset a future deposit. Any words of wisdom out there?

I know that ineligible deferrals can be distributed using APCRS.

I am interested in hearing of other practitioner's experiences and opinions on the topic.

[Alf]

The goal of correction is to make the plan whole as if the defect never occurred. The winfall should be used by the employer to reduce future deferrals. Otherwise other employees are made better off and you have not achieved full correction.

[R. Butler]

I don't see the basis for forfeiting a deferral contribution. I would distribute the ineligible deferrals plus initerest on the deferrals. If available I would rely on APCRS; if APCRS isn't available you probably have to use the Walk-In CAP.