Correction of excess deferrals and match

[Scott]

A 401(k) plan provides that if an employee defers at least 3% of his Compensation, the employer will make a matching contribution equal to 6% of the employee's Compensation. The plan document defines Compensation to exclude incentive pay. However, the plan has been operated so as to include incentive pay in Compensation. As a result, employees receiving incentive pay have been allowed to defer more than they should have and have received a matching contribution larger than they should have. How should this operational defect be corrected?

[Tom Poje]

I believe the procedure would be the same as you would handle an ineligible employee

return incorrect deferrals (+ earnings)

forfeit match (+ earnings)

see Q & A 122 on the correcting plan defect Q & A section.

Obviously, you would also have to rerun your ADP test

[R. Butler]

If the individuals affected are pre-dominantly NHCE's I don't see why you couldn't correct via a retroactive plan amendment. Similar to how you would correct inclusion of an ineligible employee under Rev. Proc. 2001-17.