Comp & deferral adjustments?

[wvbeachgirl]

Another strange situation . . .

We have a 401(k) safe harbor match plan; the plan sponsor is an S-Corp. The two owners (husband and wife) deferred to the plan in 2007 and received safe harbor match (they do have valid deferral election forms in place). Their accountant is now telling us that he is revising their compensation amounts for 2007 (the husband from $30,500 down to $3,000 and the wife from $37,742 down to $26,000) and that their deferral and SH match amounts should be $0 (husband originally deferred $20,500 and wife $10,000). We are not accountants (we're a TPA firm), but this just doesn't pass the smell test.

In the past I have had sole proprietorships and partnerships who would deposit salary deferrals from their "draw" throughout the year, and then at the end of the year when their Schedule C/K-1 showed a negative income we would then return their deferrals to them as a 415 violation. However, in the situation we have currently, both owners clearly have comp to support at least some of their deferrals and match. And obviously, FICA and federal income taxes have been withheld from their pay throughout the year and deposited appropriately, with the appropriate governmental forms being filed. So, my question is this . . . does anyone know of any regulations that would allow the accountant to revise the W-2 figures in this way (assuming that the owners have actually returned compensation they have already been paid) and take the salary deferrals down to $0? We'd just like to have a little more insight if this is addressed anywhere in the regs before we talk to the accountant about this.

Thanks!

J

[Dan]

I don't think there is too much to worry about here. There are any number of reasons why this change was made. But determining correct results, wages in this case, is his job. And if mistakes were made through the year, corrections would be in order. The loss of earnings could simply be extra expenses not previously accounted for. Since the correction was made so close to December 31, it seems even less likely to be of any questionable origin. At least to me. That or he doesn't have very much to do.

Besides, the reduced wages causes the HCEs to lose benefits, not gain them. Afterall, you can discriminate against HCEs with no fear of repercussion. As long as you have written documentation as to what the final compensation amounts, it sounds like refunds should be made for the deferrals and forfeitures of their match.

[masteff]

I have a small problem w/ the retroactive change to the deferral elections.

[Jim Chad]

Dan, I understand what you are saying about adjsuting comp. But is there any authority or logic for him to change the deferrrals to an amount smaller than the 415 limis?

[Dan]

Sorry for the confusion. There is nothing in the regs that permits contribution changes not specified in the plan document; ie mistake of fact, etc. Refunding to the company (or owners in this case) for any reason is simply not permitted. That requirementis one of qualfied plan's biggest rules, almost like QP's version of the '10 commandments.' If their document does not allow this type of change/refund/forfeiture, I would have to say to the accountant, "nice try, but that ain't gonna work." If he insists, then I would request support from a reliable source for his position. If he can not produce any and still insists, I would get a PYA letter (protect your assets) letter to the owners telling them why this may blow up in their face and that you strongly advise against it; but what do they want you to do?

I wasn't really speaking about the change in contributions. I was speaking more to the change in compensation and it's ramifications. Unless the owners have subsequent and valid elections changing to the new results, dated before the first deferrals were made, you are correct in that they can't retroactively change deferrals below the 415 limits.

[wvbeachgirl]

Sorry for the confusion. There is nothing in the regs that permits contribution changes not specified in the plan document; ie mistake of fact, etc. Refunding to the company (or owners in this case) for any reason is simply not permitted. That requirementis one of qualfied plan's biggest rules, almost like QP's version of the '10 commandments.' If their document does not allow this type of change/refund/forfeiture, I would have to say to the accountant, "nice try, but that ain't gonna work." If he insists, then I would request support from a reliable source for his position. If he can not produce any and still insists, I would get a PYA letter (protect your assets) letter to the owners telling them why this may blow up in their face and that you strongly advise against it; but what do they want you to do?

I wasn't really speaking about the change in contributions. I was speaking more to the change in compensation and it's ramifications. Unless the owners have subsequent and valid elections changing to the new results, dated before the first deferrals were made, you are correct in that they can't retroactively change deferrals below the 415 limits.

Thanks, that's what we thought as well! Just wanted to cover all the bases. Thanks again to all.

J