Corrective Contribution

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I believe the EPRCS corrections program states if the contribution for a terminated participant who has already been paid out is less than _____ you do not need to make the corrective contribution......but I cannot find the reference.......is that a true statement and if so, where can it be found?

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I did find the reference....now my next question is what would be considered a corrective contribution?

Here is my situation....I correctly calculated the 2009 ADP refunds, notified participants of the amount of distribution and tax consequences but when I faxed the distribution forms to John Hancock did not notice only the cover page was send. I discovered the error in 2011. My thought was to do a one-to-one correction but many of the NHCE affected participants are terminated and paid out. So, if the amount they would receive is less than $75, do I need to give them a contribution?

Any thoughts would be greatly appreciated.

See reference from EPCRS below:

(a) Reasonable estimates. If either (i) it is possible to make a precise calculation but the probable difference between the approximate and the precise restoration of a participant’s benefits is insignificant and the administrative cost of determining precise restoration would significantly exceed the probable difference or (ii) it is not possible to make a precise calculation (for example, where it is impossible to provide plan data), reasonable estimates may be used in calculating appropriate correction. If it is not feasible to make a reasonable estimate of what the actual investment results would have been, a reasonable interest rate may be used. For this purpose, the interest rate used by the Department of Labor’s Voluntary Fiduciary Correction Program Online Calculator (“VFCP Online Calculator”) is deemed to be a reasonable interest rate. The VFCP Online Calculator can be found on the web at http://www.dol.gov/ebsa/calculator.

(b) Delivery of small benefits. If the total corrective distribution due a participant or beneficiary is $75 or less, the Plan Sponsor is not required to make the corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant or beneficiary would exceed the amount of the distribution. This section 6.02(5)(b) does not apply to corrective contributions

[BG5150]

I think one of the scenarios of the 1-to-1 is to just give it to the NHCEs still employed at the time of correction. (Appendix B of EPCRS)

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Yes, I have read the one-to-one corection in Appendix B but I am still confused. I determined the amount to be allocated to NHCE is $3,000. I allocate that amount to all eligible NHCE participants in the year failure was not properly corrected. Turns out a significant number of those participants are have already terminated employment. Do I have to reallocate the amount originally allocated to the other affected participants so that the entire $3,000 is used up or does it mean since some of the participants have already terminated the plan does not need to put in the full $3,000 to correct the error?

Any thoughts would be greatly appreciated.

Example 1:

Employer A maintains a profit-sharing plan with a cash or deferred arrangement that is intended to satisfy § 401(k) using the current year testing method. The plan does not provide for matching contributions or after-tax employee contributions. In 2007, it was discovered that the ADP test for 2005 was not performed correctly. When the ADP test was performed correctly, the test was not satisfied for 2005. For 2005, the ADP for highly compensated employees was 9% and the ADP for nonhighly compensated employees was 4%. Accordingly, the ADP for highly compensated employees exceeded the ADP for nonhighly compensated employees by more than two percentage points (in violation of § 401(k)(3)). There were two highly compensated employees eligible under the § 401(k) plan during 2005, Employee P and Employee Q. Employee P made elective deferrals of $10,000, which is equal to 10% of Employee P’s compensation of $100,000 for 2005. Employee Q made elective deferrals of $9,500, which is equal to 8% of Employee Q’s compensation of $118,750 for 2005.

Correction:

On June 30, 2007, Employer A uses the one-to-one correction method to correct the failure to satisfy the ADP test for 2005. Accordingly, Employer A calculates the dollar amount of the excess contributions for the two highly compensated employees in the manner described in § 401(k)(8)(B). The amount of the excess contribution for Employee P is $4,000 (4% of $100,000) and the amount of the excess contribution for Employee Q is $2,375 (2% of $118,750), or a total of $6,375. In accordance with § 401(k)(8)©, $6,375, the excess contribution amount, is assigned $3,437.50 to Employee P and $2,937.50 to Employee Q. It is determined that the earnings on the assigned amounts through June 30, 2007 are $687 and $587 for Employees P and Q, respectively. The assigned amounts and the earnings are distributed to Employees P and Q. Therefore, Employee P receives $4,124.50 ($3,437.50 + $687) and Employee Q receives $3,524.50 ($2,937.50 + $587). In addition, on the same date, Employer A makes a corrective contribution to the § 401(k) plan equal to $7,649 (the sum of the $4,124.50 distributed to Employee P and the $3,524.50 distributed to Employee Q). The corrective contribution is allocated to the account balances of eligible nonhighly compensated employees for 2005, pro rata based on their compensation for 2005 (subject to § 415 for 2005).

[BG5150]

The full allocation of $3,000 get made. The population that gets it is up to the Plan Administrator, and can be any of the four given in Appendix B. It seems like in your case, one of the latter two would be best.