HCE makes elective deferrals before eligible/entered

[J Simmons]

K plan requires 21/1 and has semi-annual entry dates (calendar plan year, so 1/1 and 7/1).

Owner's wife (ergo, HCE) starts work on November 10, 2007; one of her chores is to handle payroll.

Between November 10-December 31, 2008, she electively defers $4,200 of her $5,000 pay in that period, not understanding that she had to wait for an entry date (and open enrollment period) to make elective deferrals.

It appears that the only IRS-sanctioned correction method for fixing a situation where an employee was allowed to make elective deferrals before eligible and entered per the plan's terms is to adopt an amendment retroactively relaxing the eligibility/entry rules sufficiently that makes that employee to have been properly in the plan at the time that the employee first began making elective deferrals that went into the plan. Rev Proc 2008-50, Appendix B, § 2.07(b)(3). The retro relaxing amendment would have to go further in order to predominantly pick up NHCEs when considering the HCE (wife) that needs to be picked up.

We could amend to allow for immediate entry for the k feature. This would have to be retroactive to at least November 10, 2008. However, to make this predominately favording NHCEs, the date to which this corrective amendment would have to go would be back far enough to let 2 of the 3 NHCEs working there into the plan on the dates that they first satisfied the 21/1.

That would mean that each of the 2 NHCEs would have a missed deferral opportunity re elective deferrals from the time he or she satisfied the 21/1 and the entry date allowed into the plan. That would require a company contribution 50% of the ADP for the NHCE's for that year, plus any matching contributions that it would have received for that year--adjusted for earnings. Rev Proc 2008-50, Appendix A.05 and Appendix B, § 2.02.

Does anyone know of an easier fix to this situation?

This plan might not be eligible for SCP if this is a significant operational error. Any thoughts on whether this operational error is significant or not?

(This is the tip of the iceberg. The deferrals are making the average benefits percentage part of cross-testing impossible. And at 84% of compensation for the period in question (November 10-December 31, 2008), there is a fiduciary violation for not observing the plan's imposed limit of 80% on K deferrals. Considered compensation is limited to post-entry for mid-year entrants.)

[K2retire]

I know that the officially sanctioned correction is exactly as you describe it. If I am remembering correctly, it was someone from Corbel who said that unofficially it might be permissible (or even preferable) to forfeit the prematurely deferred amounts and make the employee whole outside of the plan.

[Jim Chad]

Another option would be to amend to add a Oct. 1st entry date.

[J Simmons]

Another option would be to amend to add a Oct. 1st entry date.

Hi, Jim,

Could you help me out a little with your suggestion? How does that fix the problem?

[Jim Chad]

The rest of what I was thinking and didn't type was 9 month eligibility instead of immediate. This along with the October 1st entry date might bring in fewer other employees.....or it might make no difference; depending on the employee make up.