415 excess correction / EPCRS

[fiona1]

I know several employers who sponsor a 401(k) plan in addition to an ESOP. If an ESOP contribution puts a member over the 415 limit, then the plan language usually directed the 401(k) plan to refund elective deferrals back to the member. I suppose this is in the member's best interest so they can get the full benefit of the employer contribution (the ESOP). Anyway, this practice happens year after year and the correction was always handled by doing what the plan said.

Nevertheless, the Final 415 regulations now instruct plan sponsors to use EPCRS to correct 415 failures. Plan sponsors can still use the refund method to correct the failure and return deferrals from the 401(k) plan - but is there a concern if they do this year after year?

I know that the EPCRS says that when you self correct a failure then you should put procedures in place so it doesn't happen again.

Thoughts?

[Guest Sieve]

ESOPs are strange animals, and a Section 415 violation often cannot be prevented even though the intentions are good.

If this is a leveraged ESOP (which is paying off a loan made to the plan so that it could purchase the stock), then employer stock is allocated each year to a participant's account based on the percentage of the loan being repaid in that year--e.g., if 1/5 of the remaining principal & interest is being repaid, then 1/5 of the stock is being released from the suspense account and is being allocated to participants. But, that amount could easily result in a violation of Section 415 because (i) the required loan repayment each year is not in any way connected to Section 415 calculations, and, more importantly, (ii) the amount of the loan repayment--which is set when the stock is purchased and the loan taken--may have been set many years ago and the annual payment is required to be made under the promissory note. A company with 100 employees among whom to allocate a large annual loan repayment may now, 10 years later, be a company with only 30 employees, but is still making and allocating the same loan repayment amount each year.

In other words, a Section 415 violation cannot always be prevented in an ESOP. The company's contribution is a set amount each year until the loan is repaid, and that loan repayment does not vary from year to year. It can be the nature of the beast.

[QDROphile]

So the fact that the ESOP regulations expressly warn about section 415 violations has no meaning? If I were the jack booted thugs in the IRS I would apply my boot to a certain part of the anatomy of the employer that flouted the warning and designed an ESOP/ESOP loan that continually violated the section 415 limits. Translation of the regulation: don't be a big when you size the loan.

If circumsntances have changed, such as a decline in the employee population, one plan or the other needs to take measures to avoid the violation. That may mean limits on elective deferrals.

[fiona1]

Any other thoughts on this topic?

[Lou S.]

Any other thoughts on this topic?

We've had the same problem as you in the few ESOP/401(k) combos we do and always did refunds in the past. Not sure what will happen going forward but our plan at this point is to continue with refunds only under EPCRS.

[QDROphile]

Refunds in the past probably did not comply with the 415 regulations under the circumsntaces where the ESOP ate up most of the limit. So why are you getting religion now? Keep breaking the law. The lack of IRS enforcement is likely to continue at about the same lebvel as before and you are in the same position as before, except may for your ability to express dumbfounded ignorance if you get caught.