deferral election in writing...

[AKconsult]

I have an employer with a SH plan, 3% NEC. They also provide a match of 100% of 6% and an integrated profit sharing contribution. So, very generous to employees. Very nice employer - pays employees well, etc. Small company with less than 10 employees. The owner's wives signed forms saying that they wanted to withhold 6% of pay (since that is amount necessary for full match) but they actually contributed up to dollar limit, which for them was about 75% of pay. They are being audited and auditor wants wives to return all deferrals over 6% since that is what the form says. This seems ridiculous to me since plan is safe harbor, no one was harmed etc. Any suggestions on convincing auditor to let deferrals stay in plan?

[JanetM]

Are they allowed to change deferral election after enrolling? Seems to me they must have increased the deferral at some point. Unless the plan requires all deferral elections in writing then this isn't an issue.

[John Feldt ERPA CPC QPA]

Does the plan document even allow for these deferrals to be distributed from the plan?

How many wives does the owner have?

[RCK]

Does the plan allow deferrals of 75% of pay (or given that some came in at 6% of pay) doe it allow deferral of 80 or more % of pay?

to J4FKBC: I'm hoping that the excess contributions were made by the owners' wives as opposed to the owner's wives.

[Belgarath]

Interesting. All the plans I've seen require a deferral election in writing. If there was a written deferral election that specifies 6%, then I'd tend to agree with the auditor. (And I sure do hate to agree with auditors!!)

[austin3515]

Well I think it's owner discrimination. For example, imagine if this was an employee. Would the IRS really make you refund 69% of pay to the employee? I think not.

[Belgarath]

Owner (HC) discrimination? That's ok in the view of the IRS.

I'm not disagreeing (in fact I'm agreeing) that there's a "no harm" situation here. However, the IRS is concerned with form over function most of the time. A plan is required to be operated in accordance with its terms. Not really a generally unreasonable position when you think about it. If the plan specifies that deferrals will be accepted only according to the written deferral election, and that written election isn't followed, then you have an operational violation, IMHO. Since it wasn't corrected under RP 2006-27 prior to audit, then you have to negotiate with the auditor.

And while you may be right about the results if the employee were a NHC, I wouldn't want to bet the farm on that.

An unfortunate situation, certainly. And of course I'm speaking only in theory, since I haven't seen the language in the plan or deferral election.

[AKconsult]

Does the plan document even allow for these deferrals to be distributed from the plan?

How many wives does the owner have?

That is funny! I misplaced my apostrophe. Should be owners' wives.