415 Excess and compensation definition

[stephen]

We are administering an ESOP paired with a 401(k) plan administered by a well known insurance company. I calculated 415 refunds based on their being returned from the 401(k) plan. In several instances involving HCE's the amount of 415 excess causes the employee to be reduced below the matching percentage (50% up to 6%). So I calculated the deferral plus matching percentage that would cause the employees to max out their 415 and suggested the employer return the deferrals with earnings and use the match with earnings to offset future contributions.

However, they propose to return only salary deferrals. My contact at the TPA says their prototype basic savings plan was approved by the IRS and they are following the document.

If the 415 excess is corrected in this manner there are several HCE's who will be receiving a discriminatory matching amount as they will receive more than 50% up to 6%.

I am using The ERISA Outline Book and corresponding IRS code as my source - Chapter 5 Section II D2c (Suspense account method (Method #3) page 5.41, Chapter 5 Section II Part E #5 (amount of excess attributable proportionately to elective deferrals and matching contributions) page 5.45, and Chapter 11 Section XII part E 3 page 11.247.

Additionally, the TPA believes that due to SBJPA deferrals to the non-qualified plan should be included in the Gross Compensation for 415 purposes. I understand SBJPA changed 415 compensation definition to include elective deferrals described in 402(g)(3) (i.e. elective deferrals under a 401(k) plan, 403(B) plan, SIMPLE-IRA, SARSEP, 125 Plan or 457 Plan).(ERISA Outline Book p 1.64 Compensation definition Part A 6) Include deferrals to a non-qualified plan. I think not.

I appreciate your help and input.

[Tom Poje]

Stephen:

Obviously you have to follow the terms of the document when calculating what to refund for 415 purposes.

And it probably says refund deferrals first because that 'benefits' the person the most.

You did not indicate how you calculated this amount. did you reduce deferrals down to the 415 limit, then calculate the match that has to be forfeited or did you calcualte both at the same time...e.g. calculate a smaller deferral, then the match that will be forfeited putting the ee at the 415 limit. that would be the most minimal effect.

I would throw .08 of Appendix A of the self correction rules at them and say Sorry Charlie, this is what the regs say to do. The last two sentences are real clear on this one.

(You did not indicate if the ESOP was leveraged, whether the HCEs received less than 1/3 the contribution etc, and that of course can effect you annual addition as well.)

[stephen]

Thank you Tom,

I calculated the reduction simultaneously (reducing both match and deferrals together).

The ESOP is not leveraged. This is a cash contribution only for this year.

I will look up .08 of Appendix A of the self correction rules and send a copy of this to the client as well.

Stephen

[stephen]

The company agrees that the deferrals to the non-qualified plan should not be included in the compensation for the 415 calculation.

However, regarding the return of the deferrals the company proposes to run a current availability test. If the plan passes the current availability test the fact that there is a non-uniform rate of match is ok. Their document, as written, does not allow for the match associated with the 415 excess to be reduced. Doing so would create an operational defect.

Does this mean they do not have to follow Section .08 of appendix A of the self-correction rules?