De minimus on corrective contribution?

[BG5150]

I see in EPCRS that there is a de minimis of $75 for corrective DISTRIBUTIONS (EPCRS section 6.02(5)(b)).

But is there a de minimis for corrective CONTRIBUTIONS? More specifically, I have a plan that needs to do some true-up amounts for a profit sharing. Client believes the $75 de minimis applies for people who have terminated and took their money. (The true-up is for 2006).

Does EPCRS allow for de minimis exclusions of corrective contributions? If so, where.

Thanks in advance.

[Guest Sieve]

Others may not agree, but I don't think so. See the last sentence of the EPCRS section you cite: "This section 6.02(5)(b) does not apply to corrective contributions."

In your case, the corrective contribution must be made, but it need not necessarily be distributed to the terminated participants (if the distribution cost exceeds the amount of the corrective contribution) and it then will be shared by others in the plan or used to reduce future employer contributions (as per the use of forfeitures in the plan document).

By the way, I think this is the proper definition of corrective contributions (EPCRS Section 6.02(b)(1)): "The correction method should restore the plan to the position it would have been in had the failure not occurred, including restoration of current and former participants and beneficiaries to the benefits and rights they would have had if the failure had not occurred." In fact, you might even argue that subsequent distribution of a corrective contribution/allocation is not really a "corrective distribution" (which I think would be a distribution which is deficient and correctable under EPCRS--such as an MRD distribution), and therefore the de minimus rule you cite may not apply (since the distribution is not what is being corrected, but the conrtibution/allocation is being corrected).

[Guest ggbrock]

Absolutely agreed on all points. In this case I don't see any argument for treating as a de minimis distribution. Regardless of whether a ppt takes their money from the plan or not, if money should have been contributed to the plan on X date and it was not, it should be viewed as a corrective contribution. If there is no account "left" in the plan because the ppt left, personally, I think the administrator needs to restore/create an account and fund it with the appriate amount of the contribution. A major principle underlying these correction principles is to keep money in the plan.

By the way, I have handled a couple of situations like this and they aren't fun - most people do not understand why they have to go through the effort and time of setting up accts and giving notices, etc. to terminated ppts. However, put yourself in the ppt's shoes - if they left and should have had a $600 distribution but only had a $500 distribution, that is not the employer's money to keep.

[K2retire]

Agreed, but the employer rarely wants to make a terminated participant happy when it costs him money!

[30Rock]

Hi

I know this is an old link but I have a similar question. If the 402g limit is exceeded by 16 cents, what is the correction? Can the $75 de minimus rule be applied since it will cost more to distribute the 16 cents? Should the participant include in his 1040 as taxable income, or is there a de minimus income tax rule too?

thanks!

[austin3515]

Would it be acceptable to deposit the de minimis amounts for people who have no money in the plan to the forfeiture account, under the following logic:

Were we to open an account for the participant to deposit $1.37 (no joke), it would immediately be forfeited anyway because the plan requires that the participant pay the distribution fee, and our disclosure of fees includes the fact that your account balance "taken" as a distribution fee.

So full correction will be made to the PLAN, and we just skipped the step of opening the account before subsequently forfeiting it?

[BG5150]

Would it be acceptable to deposit the de minimis amounts for people who have no money in the plan to the forfeiture account, under the following logic:

Were we to open an account for the participant to deposit $1.37 (no joke), it would immediately be forfeited anyway because the plan requires that the participant pay the distribution fee, and our disclosure of fees includes the fact that your account balance "taken" as a distribution fee.

So full correction will be made to the PLAN, and we just skipped the step of opening the account before subsequently forfeiting it?

Is the corrective contribution a QNEC? If so, I can't see how/why it could be forfeited. At the least, it would go into an account and come out as a fee.

[austin3515]

At the least, it would go into an account and come out as a fee.

Yes, that's right, but since there is no "fee" it gets transferred to the forfeiture account. It doesn't seem to make sense that we put the $1.37 into somoene's account only pay $1.37 to FundCo as a "bonus". Rather, the money gets transferred to the forfeiture account where it will benefit the remaining participants.

[BG5150]

At the least, it would go into an account and come out as a fee.

Yes, that's right, but since there is no "fee" it gets transferred to the forfeiture account. It doesn't seem to make sense that we put the $1.37 into somoene's account only pay $1.37 to FundCo as a "bonus". Rather, the money gets transferred to the forfeiture account where it will benefit the remaining participants.

Is it a QNEC? Then it's fully vested money. If the person is still employed, it stays. If the person is terminated, it gets distributed as a force-out. However, in this case, there is no distribution, b/c the $1.37 (plus investment experience) is taken to cover the "fee." As long as other, "normal" participants are usually charged a fee.

[austin3515]

Touche... In my zeal to avoid this stupid requirement I did overlook the active participant issue.

Anyone have any ideas?? How aggressive would it be to allocate the one-to-one as a match, or perhaps to everyone who has a balance? It just defeats any measure of rationale to do anything but. No one is getting more than $5 if I allocate to all eligibles. Plus the employer is being "punished" by having to fund the QNEC, and the employees noit getting their QNEC would in all likelihood never have received any money anyway.

[austin3515]

PS VCP is not an option, as this organization is a non-profit that would prefer to spend its money helping people.

[ERISAatty]

I'm dealing with similar issue, i.e. need to make corrective contribution to plan (and I agree that there's not a 'de mimimis' exception) for contributions (as there is for corrective distributions).

I'm struggling with how employer reports corrective contributions to terminated participants. Any ideas? Box 1099-R, -MISC, W-2?

Any thoughts welcome!!

Thanks.

[BG5150]

I'm dealing with similar issue, i.e. need to make corrective contribution to plan (and I agree that there's not a 'de mimimis' exception) for contributions (as there is for corrective distributions).

I'm struggling with how employer reports corrective contributions to terminated participants. Any ideas? Box 1099-R, -MISC, W-2?

Nothing get reported until the money leaves the trust. It then gets reported on a 1099-R for the participant for the year of distribution.

[ERISAatty]

Thanks!