Contribution Made Based on Item of Ineligible Compensated

[rocknrolls2]

Company X maintains a 401(k) plan for its employees (Plan Y) under shich employees are permitted to make 401(k) contributions and X provides a matching contribution equal to a percentage of a participant's 401(k) contributions but not exceeding a specified percentage of compensation (which is defined in the Plan as including the specified elements of compensation only). During 2006, Participant M earned a bonus called N which was not mentioned in Y's definition of compensation. A 401(k) contribution was made from N and a matching contribution was based on such 401(k) contribution. What options does X have to correct this error?

[Nate X]

"During 2006, Participant M earned a bonus called N which was not mentioned in Y's definition of compensation."

I would check your definition of compensation one more time. Generally bonuses would be included unless they were specifically excluded. However, it looks like you already covered this.

Like any other error, your job is to put the plan in a position as if the error never happened. Since it happened this year, I believe any reasonable means will suffice. Here are two possible options:

Negative payroll adjustment for the contribution. Some practitioners have said this is a no-no, but it's a quick fix that works easily with most payroll providers. It's commonly used in the industry.

Treat it as a 415 failure. Refund the participant's deferrals + earnings and move the match + earnings to suspense.