Excess Contributions to PSP

[Guest cgriffin]

We have the following problem:

Discretionary 2003 profit sharing plan contributions were made in early 4Q 2003 and were allocated to all employees eligible to share in contributions as of that date. However, some of these employees left employment before the end of the year and the plan requires employees to be employed on 12/31 in order to share in contributions. Some of these employees took a distribution when they left which would have included their portion of the excess contributions.

Since these employees were not employed at the end of the year, they were not eligible for the quarterly contributions that had been credited to their accounts. Therefore, a negative contribution was entered in their statement. These negative contributions were supposed to reduce the employer's contribution to the other participants. However, the TPA's software could not accommodate these negative contributions, so they chose to enter $0s in place of the negative contributions. This had the effect of giving contributions to participants that were not eligible, and causing the employer to contribute more than was necessary for them to contribute. Many of these participants were not vested, so the amounts will go to forfeitures. Many were partially or fully vested, and will receive contributions for which they are not eligible. Since some of these employees have now left the company and taken a distribution and the employer does not think it can go back to the former employees and ask for the money back.

What problems are here vis-a-vis DOL and IRS? How are these excess contributions to be treated? All of these excess contributions were to non-highly rank and file and no HCE's benefited. The aggregate excess contributions were about $20,000.

Does the 10% excise tax apply to these excess contributions? Since there was no discrimination here (i.e. it benefited the rank and file) is there no real DOL problem?

Any help would be most appreciated.