Annual additions

[Guest bdm_7458]

Suppose an employer provides generous profit-sharing contributions every year, such that to maximize the employer contribution, a participant must contribute well under the elective deferral limit in order to maximize employer contributions. In any given year, a 415 violation would occur and could be corrected by providing a refund of the excess amount to the employee. However, if the profit sharing contribution is predictably high year after year, can the employer continue to allow the employee to contribute the maximum in elective deferrals (even knowing that 415 violations are likely to occur) and simply correct any violations through EPCRS by returning the excess employee contributions? If you answer no, how would you advise the employer to proceed to allow the employees to maximize deferrals within the plan?

[masteff]

Whereas one of the steps in an EPCRS filing is detailing what action have you taken to prevent the failure from recurring, I think knowingly letting this happen year after year would be frowned on by the Service.

Why make it all be in the Plan? Why not pay some in form of regular bonus? It's the same result as doing a return of excess deferrals (i.e., cash is put in the participants' hands). Ignoring taxes, the only downside is people w/ lower comp would then be less likely to max out in the Plan for the year. So then it's a question of demographics.

Question for others to comment on: can a profit share be defined as a % with a fixed dollar maximum (like 20% up to $30,500) (i.e., the annual additions limit minus the 402(g) limit)?

[K2retire]

Question for others to comment on: can a profit share be defined as a % with a fixed dollar maximum (like 20% up to $30,500) (i.e., the annual additions limit minus the 402(g) limit)?

Wouldn't that be either (a) contrary to the allocation formula in many documents or (b) discriminatory? I've calculated cross tested contributions that way, but without a separate allocation group to permit it, it seems problematic.

[Kevin C]

It's a fairly common plan design to refund deferrals to avoid exceeding the 415 limit. Maybe I'm missing something, but I thought EPCRS was for correcting plan document, demographic and operational failures. If they are following the terms of the plan and not exceeding 415 after applying the plan provisions, what failure is there to correct?

[Tom Poje]

in the 'old days' the 415 regs contained language in regards to refunding deferrals to correct 415 problems. As such, many plans contained such language as well. when the new 415 regs came out any such language was removed, so its no longer in there. (Therefore, I don't think it is part of document language anymore, though I could be wrong) Now the language is in EPCRS, so I think technically any such corrections fall under EPCRS (even though you aren't really doing anything different.)

[masteff]

It's addressed in EPCRS Appendix A, item .08

[Kevin C]

Thanks, I found it in the preambles to the proposed and final regs. The new regs did remove the correction methods under 1.415-6(b)(6) of the 1981 regs.

I looked at our EGTRRA approved VS plan again. There is a small paragraph in the interim 415 regulation amendment that removes the correction methods listed in the plan effective for limitation years beginning on or after July 1, 2007.

[BG5150]

I always thought it was silly for the refund to come from salary deferral. Why should my taxable income for this year go up just because my employer wanted to be generous with a Profit Sharing?

I seem to remember reading plan docs that had the 415 excesses reallocated to everyone else. Does anyone really do that?

[QDROphile]

bg5150. You have it backwards. Why would you want to give up employer money rather than have some of your money be taxable?

[BG5150]

bg5150. You have it backwards. Why would you want to give up employer money rather than have some of your money be taxable?

If I am less than 100% vested and I quit (or get fired) I lose some or all of that money.

Why not forfeit the amount that pushed it over the edge? Last-in-first-out?

Thirdly, in an "up" market, I lose all the gains I made on my money and start from scratch with the company money. For example, say my 415 excess is $500. I had that money in my account earning money since I put it in. Now I have to take it out with the earnings. The Employer deposit is only making money from when it was (probably) invested much later than the deferrals.

[Guest bdm_7458]

Interesting discussion...thank you for all of your insights.

So...have we reached a conclusion? In a new 415 regulation world, is this a permissible plan design?

[Mike Preston]

I always thought it was silly for the refund to come from salary deferral. Why should my taxable income for this year go up just because my employer wanted to be generous with a Profit Sharing?

Wow! You might want to try a few sample calculations with Excel. I'm guessing you'll be a bit surprised at the result.

[austin3515]

It seems strange to limit someone's 401(k) based on the prospect of a DISCRETIONARY contribution, just because you've always done one in the past. If the Plan has a fixed contribution, I couldn't agree more; but if its discretionary, I think it would be inappropriate to limit the deferrals.