Which method should be used to correct allocations based on inaccurate compensation in integrated profit sharing plan?

[Guest lynnewakefield]

Appendix B to Rev. Proc. 2003-44 provides two permissible methods for correcting the exclusion of eligible employees from a profit sharing plan: (1) the "Contribution Correction Method" and (2) the "Reallocation Correction Method".

Assume that a plan provides that profit sharing contributions are made pursuant to an integrated allocation formula that uses "allocation points" or another method, so that the integration rules are always met regardless of the amount of the plan contribution (i.e., the plan does not specify a certain percentage amount above and below the wage base). Also assume that the plan discovers that a prior year's allocations to certain participants were based on inaccurate compensation (not including some fringe benefit amounts that should have been included, and including other fringe benefit amounts that should have been excluded).

I interpret Appendix B to mean that the plan sponsor may correct the allocations that are based on inaccurate compensation by first determining what was the effective allocation formula for the other participants (whose compensation in the original allocations was correct) -- e.g., for participants whose compensation was correctly determined in the original allocation, this may have effectively resulted in an allocation of 8.334% of all compensation plus an additional 5.7% over the wage base. Then, the plan sponsor would make a corrective contribution, adjusted for earnings, to each affected employee who did not have sufficient compensation considered, and apply an appropriate forfeiture to employees who had too much compensation considered, based on this formula. No reduction or other adjustment would be made to the accounts of the employees whose allocations were based on accurate compensation.

However, the plan sponsor's recordkeeper believes that because the allocations were made pursuant to an integrated profit sharing formula, the mistaken allocations may only be corrected under the Reallocation Correction Method, requiring the plan sponsor to redo allocations for all plan participants (even those who were not affected by the error) and notify all participants of the change.

I have not been able to locate any information to support the recordkeeper's argument that this correction must be made using the Reallocation Correction Method. The fact that the allocation formula initially used was intended to maximize benefits to highly compensated employees doesn't seem to have any bearing on the proper correction method.

Does anyone have any thoughts on the proper correction method to be used in these circumstances?