Over Contribution to Terminated Participants

[DP]

I have a calendar year PS/401k plan with a 3% non-elective SH. They have a integrated PS formula. For the past 20 years, the company has maximized the HCE contributions each plan year. The HCE's make well over the maximum compensation limit, so at the beginning of each year, we can calculate the PS contribution percentage for the NHCE's. The plan document says that the Employer Contributions are allocated on the last day of each month. So at the end of every month, the 3% SH and the PS % is deposited into each participant's account based on that month's salaries.

With the change in the economy, the company decided not to fund the PS after the May contribution was sent in. Only the 3% SH was funded for Jun - Dec.

Now I'm trying to true up the PS contributions already deposited with the YTD salaries. If I give all eligible participants a 3% PS contribution integrated at TWB, there will only be a small amount of PS contribution due for the 2009.

However, there are nine participants who terminated mid-year. When I calculate their actual 2009 PS contribution, all of them have had too much PS deposited into their individual accounts. One of these participants has been paid out and has a zero balance.

My question is can we legally remove the excess PS contribution from the other eight terminated employees accounts? If so, how do we notify the employees?

Thanks.

[Bird]

I believe that is a mis-allocation and you can transfer it to other participants' accounts. You have to make a decision about gains or losses; it sounds like a small amount and I would probably ignore it. Write a letter explaining that the proper contribution amount is "x" but "y" was deposited so "x-y" will be removed.

[Kevin C]

The plan document says that the Employer Contributions are allocated on the last day of each month. So at the end of every month, the 3% SH and the PS % is deposited into each participant's account based on that month's salaries.

If the document says the PS contribution is allocated at the end of each month, I don't see how this could be considered a mis-allocation. When it has been allocated under the terms of the plan, it's part of their accrued benefit. The employer can not use discretion to reduce accrued benefits. 1.411(d)-4, Q&A 4.

This situation is a good example of why you shouldn't allocate a discretionary contribution during the year.

[Bird]

Sorry, I missed the part about contributions being allocated at the end of each month (why would anyone do that?!). And if that's the case, then I'm not sure I understand what additional calcs are being done at the end of the year, so I'll change my answer to "I don't know."