Profit Sharing Contribution Made by Mistake

[Guest Michelle W]

I have a 401(k) profit sharing plan whose document reads that only participants who have a year of service and are employed on last day of plan year receive a profit sharing contribution (it's a calendar year plan). Plan sponsor gave me incorrect census information (did not note a participant was terminated before the end of the plan year on the census request). Therefore, I calculated a profit sharing contribution for him and it was deposited before their corporate return was filed. Their Corbel plan document seems to address the situation of when an "ineligible employee" has erroneously been included as a participant and receives a contribution (employer can recover if it's within 12 months -- it's only been one month), but I'm not sure it this fits the situation; he was rightly a participant, but was not eligible to receive the profit sharing contribution. Any thoughts?

[J Simmons]

Michelle W,

I do not use the Corbel documents (I drafted and maintain my own prototype DC plan), but is it possible to interpret or construe the "ineligible employee" provision of the Corbel document to mean ineligible to share in the allocation of a profit sharing contribution or does the context lend itself only to be read as ineligible for the plan entirely?

If the amount actually contributed is allocated just among those for whom it was an accrual year, would that result in any of limits being exceeded (e.g., 415c)?

Does the plan have eartagged accounts and the contribution was allocated in part to the employee who didn't have an accrual year?

Do you have a written, advance directive from the employer as to what the objectives for the contributions/allocations were?

I'm just kind of fishing here a bit to see what might be possibilities.

[Bird]

It was deposited in 2007 for 2006? I'd move it to a forfeiture account, hold it there until you know the 2007 profit sharing contributions, and use it as part of the 2007 contribution. The 2006 contribution is reduced accordingly. (Depending on the allocation formula, though, removing this as a 2006 contribution might change the allocations for others.)

Or, if the business return is already finalized with the total contribution being "too high" by that amount, you could take it from that participant's account and reallocate it to the others. I'm assuming that you have segregated accounts; if not, then it's just a paper change as to who gets what.