Miscalc - one HCE

[rlb64]

Employer established an agreement with one HCE that provided additional compensation each year calculated like a profit sharing allocation, but not intended to be deposited into their 401k. The purpose was to compensation the employee for the employer's decision to replace the plan's profit sharing with a straight 3% safe harbor. Safe harbor and this agreement was effective 2002.

Staff misinterpretted the agreement and has been each year contributing this additional compensation as an additional safe harbor contribution to the 401k.

Employer has approximately 300 participants

Do we have to go VCP and $5,000 submission for this?

[Mike Preston]

Ambiguous. Numeric example, please.

[rlb64]

The formula in this agreement is a little complex, but let's say this separate agreement provides 5% of pay. This HCE received 3% normal plus 5% additional or 8% of pay as a safe harbor allocation, while everyone else received 3%. They did this every year since 2002.

[Mike Preston]

Since I presume you mean that the document called for 3%, but the individual received 8% and it looks to me that you are beyond the self-correction period. So it seems to me that there is very little choice but to file.

[Belgarath]

I'm not so sure about that. I think given that there are 300 participants, and this error was only on one person (albeit a H/C - hopefully not a majority owner? Doesn't sound like it in attempting to read between the lines) then I think you could consider this an "insignificant" error and therefore eligible for SCP without a VCP filing being required.

These determinations are facts and circumstances, with no one factor being "determinative."

You need to read Revenue Procedure 2006-27 carefully. For example, there is the Section 4, .04 requirement to have proper "Established practices and procedures." But having said all that, on the face of this, I'm thinking SCP is reasonable here.