Ineligible Participation

[KateSmithPA]

Employer allows employees to make elective deferrals to a 401(k) plan prior to becoming eligible.

I have read every post I have been able to come up with on this but I am still not certain of the correction.

I understand that the plan may be retroactively amended to change the eligiblity requirements. That is one correction.

I have read that it may be appropriate to return the deferrals to the participants (thank goodness there are no matching contributions to be concerned with). On the other hand, I have also read that you may not return the funds because there is no distributable event. If it is appropriate to return the funds to the employee, how is that reported on the 1099? Is an amended W-2 required?

I think the final option I have read about is to transfer the ineligible deferrals to the forfeiture account and have the employer make up the amount to the employee through their paycheck.

The plan document states that "If any person made Elective Deferrals erroneously, the Elective Deferrals and the associated earnings shall be distributed to that individual in the Plan Year in which the discovery was made. Alternatively, the Employer may determine if an alternative correction method may be avaiable and use said method to make the correction."

I suppose it is obvious that we should follow the plan document, but I guess I just need reassurance that the money may be distributed to the participants, and how to report such distribtuion.

Thank you.

[mbozek]

Why not amend plan to allow employees to make elective contributions after performing an hour of service.

[Guest At Peace]

Appendix B of EPCRS specifically states that an operational failure of including an ineligible employee in the plan who has not completed the plan's minimum age or service requirements may be corrected under VCP and SCP by plan amendment.

You can amend retoactively to change the eligiblity provision to provide for the inclusion of the ineligible ees to reflect the plan's actual operations. This can be done with respect to only those ineligible ees that were wrongly included.

Be sure that the amendment satisfies 401(a) and the ee's affected by the amendment are mostly nonhighly compensated employees -

Reference: EPCRS, Appendix B, 2.07 (3)

[Tom Poje]

see the following comments

http://www.reish.com/practice_areas/Techni...ps/IRStip91.cfm

(I liked it better when you were an 'MD' and not a 'PA') Ha!

[KateSmithPA]

Thank you all for your help. Tom, I can't believe you noticed the difference. I feel much less fraudulent now that I have removed the MD.