Excess match in 2000

[Guest ycurran]

Here's a fun question. I've been managing our company's 401(k) plan for a year, and we've been using a third party administrator. We switched plans and administrators in the beginning of 2001. Our previous administrators recently sent me a note that we matched to much to some highly compensated employees' accounts in 2000 (we didn't cap their salaries at the $170,000 limit).

I know that a distribution of excess contributions needs to be made after the plan year in which those contributions were made (and within 2 1/2 months to avoid any fees). Does this also apply since it's only the matching piece that is in excess and not any employee deferrals?

I tend to think we need to go through an IRS voluntary compliance program, but our former TPA says not necessary.

Thanks for any insight.

[Disco Stu]

If the only problem you have is that the matching contributions were based on compensation in excess of $170,000, then you don't have any refunds to do. You'll have to forfeit the match that was received in excess of what your plan allowed.

This isn't a discrimination testing issue (which is what the 2 1/2 month deadline applies to). This is an operational error because you didn't caclulate the match the way your plan requires you to. Because this is an operational error, you can self correct using the IRS' self correction program (EPRCS). Unless there are other nasty things that have occurred, it sounds like you should be able to rely on the self correction program.

This program doesn't require that you notify the IRS when self correcting. However you should keep good records which document that the correction was a complete correction.

[Tom Poje]

I am not sure if I would use the term 'forfeit'.

one correction method suggested under 2000-17 (Rev proc)

example 19

reduce the account by the amount involved in the 401(a)(17) failure (alonger with gains/losses) and credit the amount to an unallocated account, similar to a suspense account. use this to reduce the contribution in future years.

I just went through a similar situation, so that is our recommendation.

[lkpittman]

Tom--makes sense to take into consideration a loss when reducing the ees accounts for this correction; however, Example 19 in 2001-17 (and 2002-47) only provide for adjustment for earnings. I can't find anything in 2001-17 or 2001-47 (or other secondary sources) that specifically says adjustment for loss under the reduction in account balance correction method (our client's failure is right on point with this post). There are plenty of threads on 415 correction and whether or not to include adjustment for loss, but can you tell me how you got to the point of including losses on the reduction?

[Tom Poje]

the particular example in the rev procedure simply says

reduce the account balance by the excess (adjusted for earnings)

I interpret earnings to be positive or negative - it does not say adjusted for gains only in the example.

the correction is an attempt to put things as if the error had not occurred.

suppose it was a new ee and they had match of 10,000. failure to limit comp gave them a match of 11,000.

the plan had a 10% loss, or 1100. If I placed the full extra 1000 in match in suspense without earnings, the individual would have a balance of 11,000 - 1100(loss) - 1000 (not eligible for) = 8900.

If the mistake had not occurred, and the ee had only received 10,000 in match with a 10% loss, the balance would be 9000.

My understanding, or somewhere I read you can ignore losses - don't ask me where, it was somewhere. but that over penalizes the participant, and that hardly seems right .

[lkpittman]

Right--that was our reasoning. Not taking into consideration any losses would be to the participant's detriment. But with all of the argument going on with losses for 415 corrections, I wanted someone else to agree with us. I couldn't find much (nothing, actually) that provides more guidance on corrective reductions to accounts. Thanks!