Inclusion of Ineligible employee

[Guest emcscottey]

An ineligible employee (not highly compensated) was alowed to withold and make contributions into plan (no employer match). This was done by an agreement with the owner at the time of hire. Neither were aware of the violation. The employee then left the company and rolled over their money into a IRA. Now the plan administrator has caught the error. What are the options for correction, or do we need to do anything since the employee is terminated?

[Tom Poje]

amend the plan to make that ee eligible.

per EPCRS. see appendix B 2.07(3)

interesting, the IRS made a typo and the paragraph heading is

(3) Early Inclusion of Otherwise Eligible Employee Failure

I think that should be 'ineligible' rather than 'eligible'

full text can be found at:

http://www.irs.gov/irb/2006-22_IRB/ar13.html#d0e2927

[Guest emcscottey]

Thanks. That's what I thought, but I was really confused by the IRS typo!!

[PLAN MAN]

Give the IRS a break! I don't see it as a typo at all.

What the IRS is saying is the employee was in a class of employees eligible to participate in the plan (i.e., not a union employee or a nonresident employee, etc.) and the employee was allowed to participate in the plan earlier than the age/service/entry date provisions allow. So the employee is an otherwise eligible employee (except for age/service entry date). I think the correct method might be different if the employee was in an ineligible classification.

[Blinky the 3-eyed Fish]

Note that if you amend the plan, you will have to submit the amendment to the IRS by the end of the remedial amendment period.

[Guest Moira]

How would one correct this if the employer did not wish to amend to make the employee eligible?

[John Feldt ERPA CPC QPA]

If your plan document has a provision that allows for the return of the deferrals for these ineligibles (like the IRS-approved prototype that we use), then you could refund those amounts instead of doing an amendment and submitting for a D-letter in your cycle. Check your plan document - what does it say you can do?

[Tom Poje]

it remians to be seen how all this will work out.

return of deferrals was permitted under the old 415 regs. that is no longer true.

now it is only possible under EPCRS.

what that means for documents with language you mentioned is beyond me.

I 'defer' to the document experts.

[Guest studebaker incident]

it remians to be seen how all this will work out.

return of deferrals was permitted under the old 415 regs. that is no longer true.

now it is only possible under EPCRS.

what that means for documents with language you mentioned is beyond me.

I 'defer' to the document experts.

TP, you are correct that under the new 415 regs, deferrals in excess of 415 limits shall not be returned. However, my understanding is that this rule is limited to 415 violations. In other words, amounts contributed on behalf of an ineligible employee (ie, an employee that has not yet met service or age requirements, but is otherwise eligible) are not affected by the new 415 regs and are returnable.