Failed Nondiscrimination Test Under 401(a)(4)

[Guest CDF13]

We have a Cross Tested Safe Harbor 401k Profit Sharing Plan. The Safe Harbor is a 3% Non-elective contribution and discretionary profit sharing contributions are made every year. In going through previous plan years we found that the plan failed the Gateway Test and the Nondiscrimination Test under 401(a)(4) in 2008. In 2007 the plan passed the Gateway but failed the Nondiscrimination Test. Both tests were passed in 2009.

We have calculated what the contributions needed to be to pass these tests for both years not including any interest that will have to be paid. My question is how do we correct this? Is there a correction program available for this? And what penalties may we be looking at?

I really appreciate any guidance!!

[rcline46]

1. Failed 401(a)(4) - have you tried all mortality tables and interest rates, statutory exclusions, comp definitions, etc, etc, etc. It just might pass.

2. Failed Gateway - statutory exclusions? Check definiton of comp very carefully - that means go read the regulations and cross references thoroghly - there are some surprises in there. Then if you still are failing-

2(a) read the document carefully for gateway language, and

2(b) read Revenue Procecedure 2008-50.

Once you have fixed 2, go back to 1.

[Tom Poje]

most documents contain language regarding gateway minimums. especially now with restated documents, but you are talking a few years ago, so its hard to say. If the document contains gateway language and if someone did not receive a gateway, that is a failure to follow the terms of the document, and is correctable under EPCRS.

if the document does not contain gateway language, you have no 'right' to simply give someone the gateway. thats poor document language.

you indicated the plan passed gateway in 2007, so we'll assume the plan actually dies contain the necessary language. you further indicated the plan failed nondiscrim in 2007. under EPCRS this is referred to as a demographic failure (5.01© of rev proc 2008-50

SCP is only available for oprational failures (4.01(1))

VCP is used to correct demographic failures (4.01(2))

unless you can figure another wait ou as Mr. Cline suggests (e.g different interest rate, age nearest or age last, etc) it sounds like you are stuck using VCP if you want the safety of IRS approval.

for 2008, the gateway was failed (and assuming the document requires the gateway to be satisfied) this is then an operational failure, which is correctable under SCP. if you get lucky, fixing that will also help pass nondiscrim (thereby avoiding a demographic failure.

[Guest CDF13]

Thanks for the responses! We were able to get 2007 to pass the Nondiscrimination Test so now we just have 2008 to fix. It turns out the corrective contributions needed to correct the operational error (faled gateway) for 2008 will also be enough to pass the nondiscimination test. So we plan to use the SCP to do this.

I know that SCP does not require providing notice to the IRS so should we just make the corrective contributions for the affected participants plus interest. Is there a penalty or excise tax or need to file a 5330?

I have tried to find information online about the steps to correct this but have not had much luck. If you can point me in the right direction I would really appreciate it.

[Guest CDF13]

It looks to me that the late deposit of ER contributions will not be a prohibited transaction since ER contributions does not become plan assets until they are deposited (unlike deferrals). If I am correct on that, then we will not have to file a 5330.

Our fix will be to deposit the contributions needed to pass the gateway (which will also pass nondiscrimination) along with earnings.

What is the best way to handle terminated employees who are due a corrective contribution? Is it okay to pay them out of the employer's general assets, withhold 20% and issue 1099? Or does an account have to be reopened for them?

Thanks!

[rcline46]

Reopen the account and pay from the plan. Safest way and provides a proper audit trail.