Leaderboard

sigh (since this question comes up every year, at least I put an answer in the Coverage and Nondiscrimination Answer Book 12-11 - makes it easy to post a response!) The preamble to the final 415 regulations states that: As noted above, the final regulations provide that a plan cannot take into account compensation in excess of the section 401(a)(17) limit. In addition, the final regulations provide that elective deferrals can only be made from compensation as defined in section 415(c)(3). However, in applying these two rules, a plan is not required to determine a participant's compensation on the basis of the earliest payments of compensation during a year. [Emphasis added.] Issue 2012-1 (Mar. 20, 2012) of the IRS Employee Plan News offers the same advice: “We're Glad You Asked #2” We have a 401(k) plan and some employees’ compensation will exceed the annual compensation limit this year. Should we stop their salary deferrals when their compensation reaches the annual compensation limit? How do we calculate the employee’s matching contribution? Unless your plan terms provide otherwise, the salary (elective) deferral limit is applied uniformly to the compensation that the employee receives throughout the year. [https://www.irs.gov/pub/irs-tege/epn_2012_1.pdf]

I don't think its idyllic to know your limitations and stay within them. Rather than getting into something that is beyond your scope (and a potential minefield for both you and the client), why not play to your strengths and find a solution that you know you can handle and handle well? I seriously doubt that the RK savings of a 2 plan MEP will be so significant that other solutions can't be considered. Take Larry's example of splitting the plan to avoid audits for example. If additional cost is a concern because you are creating another plan, you can probably drop your fees to stay competitive (after all, the two plans are mirrors of each other).

I would also suggest you get with whoever is doing your payroll and make sure they figure out how to get the loan payments to stop on time. Depending on your state's payroll laws, there may be potential problems with withholding amounts from paychecks that were not authorized by the employee.

Probably not illegal or any kind of breach on the part of "the company we hired to manage the 401K ." The question of whom to blame depends on your relationships - is one company handling the investments and "third party administration" (in your view, that is probably preparing the Form 5500, although there is a lot more to it than that)? Or do you have one company that does the investments and one that does administration? In a perfect world, you and/or the payroll company know enough to stop payments on the first loan when that loan is paid off, and the administrator and/or recordkeeper recognize this and have no reason to ask questions. In a less perfect world, loan payments keep coming but someone, probably the third party administrator, recognizes this and says "wait a sec, did you mean to keep doing this?" (Often, participants want to continue the same total payments in order to pay off the second loan sooner.) In a less, less perfect world, loan payments keep coming and someone shrugs their shoulders (or an automated system effectively does the same thing) and applies the payments to the second loan. I like to think of our firm as being in the camp that would recognize and address this right away, but depending on a lot of factors, we might not even know about this until well after the fact. Not to be too blunt but ultimately any legal liability lies with the participant and the employer for not knowing enough to stop payments when the loan is paid off. When an investment company receives money they have to do something with it and applying it to another loan is the most logical option. Whether someone else c/should have caught this earlier depends on relationships and what you are paying them to do.