New Comp Contribution - Excess Deferral

[Guest AJM 34]

I have a situation where the client reported incorrect Employee Deferral figures for 2006, and in turn after the 2006 New Comp contribution was made in 2007, a few participants went over the 415 Annual Addition Limit of $44,000 for 2006. How should this be corrected?

Example:

Original: Corrected

EE Deferrals: $14,000 EE Deferrals: $15,000

New Comp PS Cont: $30,000 New Comp PS Cont: $30,000

Total Contribution: $44,000 Total Contribution: $45,000 ($1,000 over 415 Limit)

[AndyH]

Why wouldn't you simply reduce the "New Comp" allocation by $1,000 and treat that as a 2007 prepayment?

[Guest AJM 34]

Why not, you are right.

That leads me to another question. This same client want to contribute monthly to the New Comp P/S contribution, instead of making the contribution at the beginning of the following year. They want the contribution to go in as qucikly as possible, and to start getting a return on the investment.

My concern is that the New Comp Calculation is based on end of year salary, and must take into account the EE deferrals made during the Plan year as to not go over the 415 limit. In addition, they must pass the non discrimination testing.

Do you know if it is possible to make the New Comp PS contribution every month during the plan year?

[wsp]

Why wouldn't you simply reduce the "New Comp" allocation by $1,000 and treat that as a 2007 prepayment?

Wouldn't this approach work only if accounts are pooled or there is a forfeiture/suspense account?

[rcline46]

On your first question, check the document, it might say the deferrals are returned for the 415 violation. Very important to read the document.

On your second question, if the plan calls for end of year, 1,000 hour requirement to receive a contribution AND the plan is self-directed, you cannot allocate money deposited under the terms of the document (profit sharing side) and so the contribution could be construed as an operational failure. Not good.

If the plan is a Safe Harbor plan, the SH contributions could come in timely. And you absolutely cannot take PSP money for the HCEs only! This is a discrimination issue and the IRS would not look kindly on the practice. Just say no, OR make no allocation requirements for the er contribution, and only permit the gateway contribution amount to be contributed for everyone.