Correcting deferrals on non-deferrable comp.

[Guest Bud]

I have a question about correcting deferrals on non-deferrable compensation (according to the plan document). Take for example Participant A who elected to defer 5% of comp. The plan received 5% of deferrable comp and 5% of non-deferrable comp. Participant A could have elected to defer at a higher percentage and probably intended to defer up to the full 402(g) limit or at least 5% of deferrable and non-deferrable comp (because he hasn't complained yet about excess deferral amounts).

Do you think we should return deferrals on the non-deferrable comp? Do you think plan qualification is safe with keeping those deferrals in the plan under the assumption that Participant A would have elected a higher percentage had he understood that a large portion of his total comp was not deferrable?

The plan document is clear about deferrable comp, but participant communication (SPD, forms, memos, etc.) is vague. The IRS may have a qualification issue with keeping the money in the plan, but the DOL may have an issue with returning the money because participants may not have made an informed decision.

[E as in ERISA]

The terms used for administration of the plan on a payroll by payroll basis may sometimes be different than the terms used for testing at the end of the year. The definition of compensation or earnings that is used when the employee completes the election form is not necessarily the same as the definition of "Compensation" in the plan. You may be okay provided you have not technically violated the terms of the plan or the code when it comes to total allocations and testing for the year. For example, I think that the IRS has informally indicated that deferrals do not need to be stopped when the participant's salary has reached the 401(a)(17) limit for the year.

[Guest Bud]

Katherine, that's brilliant. I have reviewed the election forms and it does not use the definition of compensation used by the plan. I think we can go with the participant's intent.