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In re-thinking (and looking it up in EOB ) I agree: 3. Crediting rules for forfeitures. Forfeitures are annual additions for a limitation year if they are allocated as of any date in that year. See Treas. Reg. §1.415©-1(b)(6)(i)(D). 3.a. Example. For the limitation year ending September 30, 2010, there are forfeitures totaling $18,000 under a profit sharing plan. To the extent those forfeitures are allocated for the year ending September 30, 2010, they are treated as annual additions for that year, even if the actual determination of that allocation occurs after the close of the plan year. For example, if the plan administrator does not actually perform the allocation until May 10, 2011, the forfeitures allocated as of the September 30, 2010, allocation date are still treated as annual additions for the limitation year ending September 30, 2010, even if May 10, 2011, would be later than the section 415 crediting deadline described above that applies to employer contributions.

I would take the position that the plan called for the allocation as of the last day of the plan year and you just didn't go to the step of moving money around within the plan. In my opinion nothing magical happens when you move money from the forfeiture account to the participant account. For example, should a pooled plan be treated as in compliance and a daily val plan treated as disqualified for precisely the same situation? I think not!

...or when they hire an employee and don't tell you.

"TPA software sounds interesting, but I'm still not sure it can truly track performance of EE vs ER, or actually if that is necessary." It's borderline insulting when someone comes to a message board focus on 401k PLANS and someone comes in and suggests that the distinguished posters who have been posting for years, and/or have been working exclusively in plan administration for years, somehow don't know what we are talking about. So to make a statement like "I don't believe that a commingled account can be adequately segregated between employer and employee" is basically proving the point to the rest of us who are "in the know" that you are in way over your head. And frankly the biggest mistake you are making is to assume we do not know what we are talking about. To be honest, segregating the account between employee and employer is quite simple. you can allocate the gains to each source pro rata on a spreadsheet once a year. There, I've answered your direct question. But that wasn;t our point. Our point is that when the plan is penalized for never executing its PPA restatement, your client will blame you. Or when they take a distribution of their pre-tax account before attaining age 59.5, they are going to blame you for not telling them it was illegal to do so. Or how about if they contribute $18,000 to the Plan by writing a check to the Plan even though there W-2 wage are only $12,000 that year. Again, your fault. How about they take a loan and send you an amortization schedule with annual installments and you don't tell them the loan is a deemed distribution. I can go on and on about all of the things your client will definitely blame on you. But I've bored myself now. To quote ETA Consulting: Good luck!

I don't disagree with ETA. However, when the IRS gets a late return, their first correspondence is often "your form is late and based on the # of days the penalty is $15k." That letter also contains information on how to go through the DFVC with a small user fee rather than the 15k. In this case, the return was filed on an EZ so they obvously would not include the DFVC info, and based on the year (2013) Im not sure if its eligible for the EZ program. In any event, it should be taken seriously and requires immediate attention.

I don't want to appear too blunt and want to provide as much relevant information as possible. When the IRS reaches out for information, this matter should be taken seriously. When it's not, these letters start to fly (and they are automatically produced by computers). So, it would behoove the client to obtain the services of someone who actually represents clients before the IRS to provide a reasonable explanation of why the Form 5500 was not prepared and submitted. Too often, in our industry, that cause is due to the TPA the client has hired actually not following through on ensuring the completion of the reporting. I've seen this happen toooooo many times during my career. When I'm representing a client before the IRS, I never hesitate to suggest to the IRS the extent to which Plan Sponsors rely on skilled professionals to maintain proper compliance and the tendency for many service providers to fulfill those responsibilities. Again, not the be too blunt, but those $15,000 letters typically go out after the IRS has reached out for explanation and likely received a half-assed response. Given where you are, it's time to think seriously about showing an understanding that this report should've been filed and providing the IRS a reasonable explanation on why it wasn't. This is merely where you are in this process. Good Luck!