profit sharing correction

[Guest JohnSB]

We need to correct allocations made in 2006 that used W-2 wages minus deferrals as compensation. Can we self correct this by adding money to the people that were shorted? Or, do we only raise those that received a smaller percentage than the average of the highly compensated employees? Is there another answer?

Does the answer change if we were told the plan will not allow QNECs?

[Guest dmartin@swerdlin.net]

Okay, so you allocated a profit sharing contribution on the wrong compensation. How you handle it generally depends on the client, and the size of the plan.

the best approach would probably be to perform a contribution allocation calculation using the original contribution amount or percentage and the corrected compensation. Then compare the newly calculated contributions amounts by participant to their original allocations. If the new amount for a particular participant is higher, have the client make up the difference. If the new amount for a particular participant is lower, instruct the client to have the difference withdrawn from the participant's account.

This approach is not always feasible, however. The other way to correct the allocations is to calculate the rate of allocation originally received by a participant who did not happen to make any deferrals during the year (Participant A), and increase the allocation for all those participants who did make deferrals during the year (using their correct compensation) until their allocation rate is the same as Participant A's allocation rate. This approach assumes that the allocation rate for all participants is supposed to be the same. In other words, the contribution formula is not integrated or cross-tested. If the plan is cross-tested, make sure that after the correction, all participants in the same group have the same allocation rate.

Finally, depending on when the original contribution was deposited, you may want to also calculate lost earnings on the additional allocations participants receive.