Section 415 Limits - Which came first?

[austin3515]

Plan where the employee made $30,000 and did 16,500 of 401k and did another $20,000 of profit sharing. Solo 401k plan so they're all the owners additions.

In EPCRS it keeps saying "if the excess is attributed to elective deferrals" do this, and "if attributable to something else" do that.

How do I determine which it's related to? It's not any one dollar, but all of the dollars in total.

[K2retire]

Since the PS is way beyond the deduction limit, I'd look for a way to make that be the source of the excess.

[QNPG]

Plan where the employee made $30,000 and did 16,500 of 401k and did another $20,000 of profit sharing. Solo 401k plan so they're all the owners additions.

In EPCRS it keeps saying "if the excess is attributed to elective deferrals" do this, and "if attributable to something else" do that.

How do I determine which it's related to? It's not any one dollar, but all of the dollars in total.

Chapter 5 - Section 415 Limits, Section II, Part D, Correcting excess annual additions of the ERISA outline:

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1. EPCRS correction method for excess annual additions. Section 6.06 of Rev. Proc. 2008-50 prescribes the correction method for “Excess Amounts,” which are defined to include excess annual additions under a defined contribution plan. The effective date of Rev. Proc. 2008-50 is January 1, 2009. Prior to 2009, the EPCRS also was available to correct excess annual additions, but the regulations under IRC §415 (prior to the finalization of amended regulations on April 5, 2007) also included corrective mechanisms. See 2. below.

Cross-reference tip. A complete discussion of the EPCRS procedure is provided in Section VI of Chapter 15. The corrective mechanism for excess annual additions is also addressed in that section.

1.a. Excess annual additions relating to elective deferrals or after-tax employee contributions. To the extent that the excess annual additions relate to elective deferrals or after-tax employee contributions, the corrective mechanism is to distribute the excess amount (with attributable earnings). See section 6.06(2) of the EPCRS Procedure. An ordering rule is prescribed for making the correction when the violation involves IRC §415:>

✔ First, distribute unmatched after-tax employee contributions (if any)

✔ Second, distribute unmatched elective deferrals (i.e., both pre-tax elective deferrals and designated Roth contributions), except to the extent that the elective deferrals are properly characterized as catch-up contributions (see 1.a.4) below)

✔ Third, distribute matched after-tax employee contributions, where the excess is apportioned between after-tax employee contributions and the associated match, based on the matching formula (e.g., if the match is 50% of the contributions, then the excess is apportioned on a 2:1 ratio of after-tax employee contributions and related match)

✔ Fourth, distribute matched elective deferrals, where the excess is apportioned between elective deferrals and the associated match, based on the matching formula.

The portion of the excess attributable to matching contributions under the third and fourth steps above is deducted from the employee’s account balance and allocated in accordance with the Reduction of Account Balance Correction Method described in 1.b. below.

1.a.1) Example. A 401(k) plan allows for elective deferrals, both pre-tax and Roth. After-tax employee contributions are not permitted. The plan matches 50% of the first 6% of compensation deferred. Henry has excess annual additions totaling $6,600. Henry made elective deferrals totaling $15,000 for the limitation year. Henry’s compensation is $200,000, so only the first $12,000 deferred was subject to matching contributions, and the remaining $3,000 of elective deferrals were unmatched. All of Henry’s elective deferrals were pre-tax elective deferrals. Under this correction method, the Henry has made enough deferrals to use the distribution rule described in 1.a. above to correct the IRC §415 violation. Only the second and fourth steps described in 1.a. above apply, because there are no after-tax employee contributions allowed under the plan. To correct $6,600 of excess annual additions, $5,400 of Henry’s elective deferrals are distributed and $1,200 of his match is forfeited and corrected under the Reduction of Account Balance Correction Method described in 1.b. below. This is determined as follows:>

(1) Total amount of elective deferrals: $15,000

(2) Amount of elective deferrals subject to match: $12,000

(3) Match on amount in (2): $6,000

(4) Excess annual additions: $6,600

(5) Unmatched elective deferrals to be distributed: $3,000 (i.e., (1) minus (2))

(6) Remaining excess after step (5): $3,600 (i.e., (4) minus (5))

(7) Remaining excess attributable to elective deferrals: $2,400 (based to 2:1 ratio of deferrals to match, or 2/3 x the amount in (6))

(8) Remaining excess attributable to match: $1,200 (based on 2:1 ratio of deferrals to match, or 1/3 x the amount in (6))

(9) Total corrective distribution: $5,400 (i.e., (5) + (7)) (as adjusted for earnings)

The corrective distribution described in (9) is adjusted for earnings. The remaining $1,200 of the total excess annual additions, which is attributable to match (as shown in (8)), is subtracted from the account under the Reduction of Account Balance Correction Method described in 1.b. below.

1.b. Excess annual additions attributable to other amounts. To the extent the excess annual additions are attributable to employer contributions (i.e., matching contributions and/or nonelective contributions), the Reduction of Account Balance Correction Method prescribed in section 6.06(2) of the EPCRS Procedure applies. Under this method, the affected participant’s account balance is reduced by the amount of the excess annual additions (as adjusted for earnings). If such amount would have been reallocated to other participants in the year of the failure, then the excess amount (as adjusted for earnings) is allocated to such participants in accordance with the terms of the plan. If such amount would have not have been so allocated, then the excess amount (as adjusted for earnings) is placed in an unallocated account and used to reduce employer contributions (other than elective deferrals ) for the current year or, if necessary, subsequent years. In the example in 1.a.1) above, the $1,000 of matching contributions that is considered to be part of the excess annual additions is corrected through this Reduction of Account Balance Correction Method. This method is really a blending of Method #1 (to the extent reallocated) and Method #3 (to the extent credited to the unallocated account for allocation in subsequent years) that had been prescribed by the old IRC §415 regulations, as explained in 2.b.1) and 2.b.3) below.

[austin3515]

K2 - right on! Once I gave up on the 415 correction, I decided to look into my other problem, max deductible.

Does the Corbel EGTRRA 401k prototype allow for a refund of employer contriutions based on revenue ruling 91-4 (i.e., contribtion exceeds max deductible due to a mistake of fact). I did not see it... Does it need to be in the document?

In my case, the CPA thought the LLC was being taxed as a partnerhsip, but it was an S-corp, and W-2 wages did not suport it. Not sure if you agree, but we think a) this was definitely a mistkae, and b) the "fact" was the form of entity regarding which the CPA was mistaken (I'm pretty sure it switched in 2010)!

[Guest Sieve]

What does the plan document say about reduction in a 415 excess situation? Usually, it will call for reduction of deferrals first. Follow the document.

And, as K-2 points out, seems like you'd still have a deduction issue if the reduction is deferrals 1st (but probably not if you reduce employer NEC 1st). Does the plan allow for the return of employer contributions in this situation?

[austin3515]

From 1(a) above: To the extent that the excess annual additions relate to elective deferrals or after-tax employee contributions, the corrective mechanism is to distribute the excess amount (with attributable earnings). See section 6.06(2) of the EPCRS Procedure. An ordering rule is prescribed for making the correction when the violation involves IRC §415:>

This is what I'm talking about!!!

[austin3515]

What does the plan document say about reduction in a 415 excess situation? Usually, it will call for reduction of deferrals first. Follow the document.

Sieve, in light of you vast and extensive contributions I will over-look your oversigth regarding the changes to the final 415 regs which now require that the sole means of correcting 415 violaqtions is through EPCRS

[Guest Sieve]

You are much too kind . . .

[Tom Poje]

ooooh. Austin shoots and scores against the Sieve.

now what does that make the score?

[austin3515]

I only keep score when I'm winning so I have no idea...

[Guest Sieve]

Hey . . . you know what they say about blind squirrels/left wings on breakaways . . .

austin -- Look at Corbel's Basic Plan Document (Section 10.7) for the mistake-of-fact /deductability language you are looking for. But, is this really a mistake of fact? If the deposit was made early in the year and the employee simply did not earn enough for it to be deductible, that's one thing, while making the deposit after year-end and simply not fully understading the deduction limits is another. As Rev. Rul. 91-4 says:

"In general, such reversions will be permissible only if the surrounding facts and circumstances indicate that the contribution of the amount that subsequently reverts to the employer is attributable to a good faith mistake of fact, or in the case of the disallowance of the deduction, a good faith mistake in determining the deductibility of the contribution."

[austin3515]

My professional opinion is that this is a mistake of fact (at least that's the position we're taking, but of course EVERYTHING is subject to 2nd guessing). It is not simply that he didn't earn enough. It was a misunderstanding regarding how the income would be reported on the tax return.

But of course, we will be including the requisite CYA language.

P.S., thank you very much for the site in the Corbel document!!

[austin3515]

JackPot (courtesy of TAGData)

EPCRS (2008-50), 6.06(2), a little more than halfway through that giant paragraph:

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 after-tax 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.

[Guest sherrif737]

I have a 415 failure and need to make a correction, but alas, the employee has terminated and taken his funds. What are my responsibilities here?

[fiona1]

I have a 415 failure and need to make a correction, but alas, the employee has terminated and taken his funds. What are my responsibilities here?

First you'll want to determine what contributions make up the 415 excess. Are you dealing with deferrals? match? employer money? All of the above? Per the EPCRS - Employer money (including match) needs to be forfeited. The employee is not entitled to the employer portion of the correction. So the employee needs to send this money back to the plan. The EPCRS does provide a deminimus amount of $100.

Now if you have elective deferrals, roth deferrals, or employee contributions (after-tax voluntary) that makes up the correction - which would normally have been refunded to the employee - then you have to consider the taxation impact. 415 refunds are not eligible to be rolled over. So when this employee took their funds - you'll need to determine if they were rolled over or not. If yes, then you'll need to contact the employee and inform them that a portion of their rollover was ineliglbe to be rolled over. They will need to contact the financial institution - and that FI will either need to refund that money, or treat it as a contribution - depending on what kind of vehicle it was rolled over to.