Extra Match causing 415 violations/testing problems in off plan year.

[Guest Brenda Schachle]

We have a client with a 9/30 yearend, on corporate extension, must make the er match by 6/15. Year ending testing required returns for HC to pass ADP/ACP tests based on a 100% employer match. Now the owner has decided to add an additional $25,000 to the original match amount. (Now, 117% match!) With this addition, again not passing ADP/ACP so we will forfeit the additional match %'s for the HC's (too bad) but, additionally this extra money is causing about 10 415 violations in the NHC's. Don't we need to return the deferral money first to pass 415? Then I expect we will have more kicking over 25% once the first wave is cleared. Any suggestions? I told the owner he would have been better off paying himself a $25k bonus!

[Guest xplan]

What does the plan document say? The correction method for these violations is normally discussed in the "Limitations on Allocations" section to the base plan document. In addition, if this is a prototype plan, you may want to check the AA for the corrective method selected.

I have used the "refund of ee contributions method", the "spillover method" and the "suspense account method." However, in each case the plan document provided the proper correction method to be used.

[Guest xplan]

Also, if you find that you must give back ee deferrals, please keep in mind that if they are being returned to NHCE's, they are not taken into account when testing ADP. In addition, any respective match money would need to be forfeited accordingly before you finalize your nondiscr. testing results for the plan year.

[Guest Brenda Schachle]

The method is: (1) distribute elective deferrals and hold any "excess amount " remaining after the return in a suspense account. Yeah, I know I will need to rerun ADP/ACP testing. ALos, I have to calculate earnings on the returns...it keeps snowballing.

[M R Bernardin]

Here is something to think about. You are not supposed to contribute anything that puts someone over the 415 limit, unless the excess is due to a "reasonable error" in estimating compensation, etc. You are well past plan year-end, so it is hard to see how this is due to an error in estimating compensation. Unless there has been such an error, the regulations don't allow you to correct an excess through distribution of deferrals, etc. So, what should have happened is reducing the amounts contributed.

[Guest Brenda Schachle]

point taken. I considered that "a reasonable error" had been made in determining the amount of elective deferrals. This plan traditionally has a 100% match. This $25k extra makes it a 117% match -- no one could have seen it coming. Instead of $25k, I may calculate the maximum amount contributable without exceeding 415.

[Guest Brenda Schachle]

The maximum that can be contributed and not have anyone failing 415 for the plan is $1,100 (instead of the intended $25,000). Since we anticipate 100% match several ee's contribute 12%. I know the employer is looking to maximize his deduction for tax purposes. The $25k brings the plan contribution in at just under 15%. If this situation does not pass for a reasonable circumstance then the balance can not be contributed to the plan, correct? This employer cannot reach the 15% deductible limit this year, correct?

[M R Bernardin]

If this were a profit sharing contribution, I would say the employer could get to the 15% limit, because if an employee hits his or her 415 limit, you would just reallocate the money to other employees who hadn't reached the limit, and 401(a)(4) allows you to treat all employees as receiving the same percentage if the reason the percentages are different is because of the 415 limits. I'm not aware of a similar rule for matching contributions. You could declare an extra match of $25,000, to be allocated based on participant deferrals, and to the extent the allocation would cause a participant to exceed his or her 415 limit, those participants would be capped at the 415 limits and the excess would go to other participants, who would get an even greater match. However, it appears you would potentially have a situation where different participants are receiving different rates of match. I'm not sure about that, because it seems in theory everyone had the right to the same rate of match, so maybe that's not a problem. It needs to be considered.