Ineligible Deferrals

[Leopurrd]

Hi Everyone,

Until this morning, I would have been 100% sure that the only corrective action for ineligible deferrals without amending the plan (for whatever reason, whether it be a suspension due to hardship or wrong entry date by plan sponsor) would be to use the deposit as a prepay in the plan and have the employer make the participant whole through an additional payroll check (to withhold the necessary taxes).

However, after speaking with a colleague, it was pointed out (and I also researched) that VCP allows you to treat these deferrals as a corrective distribution and pay the (ineligible) deferrals and earnings out of the plan and report with a 1099R??

I wanted to make sure I read and heard correctly, because it sounds very weird to me!

Thanks for your thoughts/comments.

Vicki

[Locust]

I would do generally go the prepaid route. The exception might be if you've crossed the calendar year without reducing the account. Once you've passed December 31, the employee's taxable income is (in a sense) set.

[ERISAnut]

Hi Everyone,

Until this morning, I would have been 100% sure that the only corrective action for ineligible deferrals without amending the plan (for whatever reason, whether it be a suspension due to hardship or wrong entry date by plan sponsor) would be to use the deposit as a prepay in the plan and have the employer make the participant whole through an additional payroll check (to withhold the necessary taxes).

However, after speaking with a colleague, it was pointed out (and I also researched) that VCP allows you to treat these deferrals as a corrective distribution and pay the (ineligible) deferrals and earnings out of the plan and report with a 1099R??

I wanted to make sure I read and heard correctly, because it sounds very weird to me!

Thanks for your thoughts/comments.

Vicki

Without the "creative accounting" tactics to make it look as if there were never any ineligible deferrals made, VCP would be the only method of having those funds removed from the plan. Note that VCP, unlike SCP, requires IRS involvement since there is otherwise no statutory authority for those funds to get distributed from the trust. Trying to distribute outside of VCP would only serve to create other violations of failing to follow the terms of the plan and perhaps improper distributions and even 401(k)(2) violations.

A mistake in fact is always a self correction option in the event the employee was allow to contribute due to a mistake in determining eligibility when in fact he was not eligible. But, when the employee exceeds a plan imposed deferral limit (say 10% of compensation) then there is not plan provision allowing for this to be corrected; and a distribution to get the employee down to 10% would only create another violation. This is why the IRS involvement is necessary. That's VCP, not SCP.

[Leopurrd]

Thanks for the replies. They were very informative!!!

Vicki