safe harbor plan with 415 excess

[AKconsult]

I have a client that gives a SH 10% NEC at the end of the year. The 10% is written into the document. I have explained to client that he could do 3% SH and the rest discretionary but he does not want to.

For 09, once we allocate the 10%, there are 5 people who will be over the 415 limit, because ER also gives a pay period match.

Document states that if an ER contribution will cause the plan to fail 415, the plan should reduce the contribution. However, I wonder if that applies in the case of a safe harbor contribution. I am reluctant to not give the full 10% since it is a required SH contribution. On the other hand, since plans really only have to give 3% in order to be safe harbor, maybe I could reduce the contribution as long as I don't go below the 3%.

Has anyone seen any guidance about whether a SH can be reduced because of 415 problems? The next remedy, according to the document, would be to return the employee deferrals till the plan passes.

[david rigby]

Thou shalt not violate 415.

[Lou S.]

Yeah, my understanding is refund is still allowed to correct 415 excess but not by document provsions. Only through EPCRS.

[austin3515]

Most documents used to indciate that if there is a 415 excess, it 401k gets refunded, so someone doesn't lose out on employer provided benefits. I would assume that is still available under EPCRS?

[Tom Poje]

shame on you. never assume anything. memorize the following as your penalty.

but in this case you are correct, EPCRS is pretty specific

Section6.06 (2)

(2) Correction of Excess Allocations. In general, an Excess Allocation, as defined

in section 5.01(3)(a) of this revenue procedure, is corrected in accordance with the

Reduction of Account Balance Correction Method set forth in this paragraph. Under this

method, the account balance of an employee who received an Excess Allocation is

reduced by the Excess Allocation (adjusted for earnings). If the Excess Allocation would

have been allocated to other employees in the year of the failure had the failure not

occurred, then that amount (adjusted for earnings) is reallocated to those employees in

accordance with the plan's allocation formula. If the improperly allocated amount would

not have been allocated to other employees absent the failure, that amount (adjusted for

earnings) is placed in a separate account that is not allocated on behalf of any participant

or beneficiary (an unallocated account) established for the purpose of holding Excess

Allocations, adjusted for earnings, to be used to reduce employer contributions (other

than elective deferrals) in the current year or succeeding year(s). While such amounts

remain in the unallocated account, the employer is not permitted to make contributions to

the plan other than elective deferrals. Excess Allocations that are attributable to elective

deferrals or after-tax employee contributions, (along with earnings attributable thereto)

must be distributed to the participant. For qualification purposes, an Excess Allocation

that is corrected pursuant to this paragraph is disregarded for purposes of § 402(g), §

415, the actual deferral percentage test of § 401(k)(3), and the actual contribution

percentage test of § 401(m)(2). If an Excess Allocation resulting from a violation of § 415

consists of annual additions attributable to both employer contributions and elective

deferrals or after-tax employee contributions, then the correction of the Excess Allocation

is completed by first distributing the unmatched employee’s after-tax contributions

(adjusted for earnings) and then the unmatched employee’s elective deferrals (adjusted

for earnings). If any excess remains, and is attributable to either elective deferrals or

after-tax employee contributions that are matched, the excess is apportioned first to aftertax

employee contributions with the associated matching employer contributions and then

to elective deferrals with the associated matching employer contributions. Any matching

contribution or nonelective employer contribution (adjusted for earnings) which constitutes

an Excess Allocation is then forfeited and placed in an unallocated account established

for the purpose of holding Excess Allocations to be used to reduce employer contributions

in the current year and succeeding year(s). Such unallocated account is adjusted for

earnings. While such amounts remain in the unallocated account, the employer is not

permitted to make contributions (other than elective deferrals) to the plan.