Corrective Contributions and 402(g) Limit

[Guest pcohen]

Employer's 401(k) plan provides for immediate eligibility but administrator improperly applies a 90 day waiting period for allowing new employees to make elective deferrals. The employer is prepared to make corrective contributions in accordance with the safe harbor under EPCRS, which provides that the amount of a corrective contribution is reduced to the extent that it would cause an employee's elective deferrals for the year to exceed the 402(g) limit. Since 402(g) is determined with respect to all plans in which the employee participates during the year, does the employer making the corrective contribution need to determine what the employee's elective deferrals were under his prior employer's plan? If the answer is no and the error which occurred in 2007 is being corrected now (i.e., after the due date for distributions of excess elective deferrals), isn't this putting the employees into a potential double tax situation with respect to the corrective contribution? On the other hand, if it's not the correcting employer's obligation to make this determination and there is no tax reporting requirement with respect to the corrective contribution, it doesn't appear that the IRS would know that the 402(g) limit was exceeded.

Any thoughts on how this issue is handled under SCP?

[ERISAnut]

I think that in all instances, corrective contributions funded by the employer enters the plan as a QNEC. This would be the calculation of the missed opportunity to defer plus the calculated matching amounts. Even though the functionally used to determine the amounts are based on these 'other sources' the actual contributions funded by the employer are actually deposited into a QNEC source. This would render effectively allow them to be included in the ADP and/or ACP tests (since they are QNECs) without recalculating 402(g).

Now, whether or not these amounts are needed when the employee as met is 402(g) limit is an area that I won't care to address.

[Guest Sieve]

I think the provision you reference simply permits the employer to limit payment of its corrective QNEC--i.e., the employer doesn't have to replace an elective deferral which could not have been made in the first place due to 402(g) limitations. Your guess is as good as mine as to whether you can include in that 402(g) limit any previous deferals with a prior employer (assuming you can determine those amounts). Therein lies the practical problem, however--how do you find out?

[ERISAnut]

Okay, I think I totally blew parts of the question. The terms 402(g) testing and ER corrective contributions threw my mind into another area. While the correction you referenced allows corrections to be made to 402(g) limit (which is the area I refused to respond to in my last post) which does involves all plans the employee is a participant of; in the event such information in unavailable, then the only alternative is to rely on 401(a)(30) for the correction. Even though the employee makes out, it would not be double taxation because the excess is being funded by the employer.

Fact Pattern: Employee was never a participant in another plan and was held out for 3 months. Deferred $15,000 to the plan for the 9 months he was permitted to defer. Employer corrective contribution limited to $500 (plus whatever match...).

There is a non issue here.

Fact Pattern Changes. Instead, the employee was a participant in the plan of another employer where he deferred $10,000. Employee was held out of new plan for first three months, but when allowed to enter, he deferred only $5,500. Unknown to the employer is the fact the employee was in a prior plan.

Notice, the corrective contribution here is funded by the employer. It doesn't cause a 402(g) violation. It is a QNEC. The employee breaks away clean as the employer has no responsibility for ascertaining what happened in the plan of another employer. However, if such information was known by the employer (meaning the employee requested his deferrals be limited to $5,500 because of deferrals to another employer's plan) then the employer could limit. In any event, there is not double taxation. Notice here that the employee gets away clean by not disclosing the deferrals to the previous plan.

[Loves401(k)]

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