Corrective Contributions

[IRA]

Per Rev. Proc. 2008-50, you don't have to make corrective distributions of $75 or less if the cost is more than the distribution. But Rev. Proc. 2008-50 says further that this rule does not apply to corrective contributions.

So if you're corrective contribution for one participant is less than $75, do you have to make it?

If so, what do you do? Allocate it to the other employees' accounts or use it to pay plan expenses (if you can) or something like that?

[J Simmons]

Per Rev. Proc. 2008-50, you don't have to make corrective distributions of $75 or less if the cost is more than the distribution. But Rev. Proc. 2008-50 says further that this rule does not apply to corrective contributions.

So if you're corrective contribution for one participant is less than $75, do you have to make it?

If so, what do you do? Allocate it to the other employees' accounts or use it to pay plan expenses (if you can) or something like that?

Yeah, you need to make corrective contributions. There's no de minimis that I am aware of for not doing that.

You'd need to allocate it to the benefit of the one participant for whom it is made. If that participant is no longer an employee, and would forfeit it (it's not a QNEC, QMAC or other immediately vested type of benefit and he has too few vesting years), then you'd treat it like any other forfeiture under the plan. If the plan says so, you can apply it to plan expenses. If it doesn't, you reallocate it among the accounts of the other participants at the right time. (Many plans have IRS-approved provisions that allow you to suspend reallocation until the amount of the forfeitures reach a certain minimum amount, such as $1,000, in the aggregate--so that you are not having to pay more for the reallocation calculations than the amount that is being reallocated. Check your plan docs.)

If he's entitled to payout of it, you might think of it as a 'corrective' distribution since he should have received the amount earlier, after it had been contributed and his employment terminated. That way, you do not have to process it as a distribution if the costs of doing so would equal or exceed the amount involved (and it is under $75). You'd just treat it as a forfeiture described in the paragraph just above.

[401 Chaos]

John,

I'm having CPAs question the approach noted in the last part of the reply here--i.e., that if the participant with a missed contribution gets a de minimis amount you could somehow just make the contribution to the plan but could come within the de minimis distribution exception. Do you know if the IRS has endorsed this approach / interpretation, even informally? It seems like the kind of exception that would sort of swallow the rule in many cases. Thanks.

[Belgarath]

I would pose this question to Avaneesh Bhagat at the IRS. He's the one who is the supposed guru regarding EPCRS issues/questions.

And if you do, would you be so kind as to post his response?

[401 Chaos]

Belgarath,

Thanks for the suggestion. I will give that a try although I must say that my prior success in obtaining informal advice / responses to cold calls or emails to the IRS is fairly low (particularly in real time) but am hopeful we may have some luck here. Seems like this is the sort of issue that is likely to have come up enough that there would be a fairly clear rule. (Maybe there is and I am just afraid to accept that.) In this particular case, the plan permitted folks to come in right away and there were some part-time folks with low pay and short-term employment that appear to be entitled to truly de minimis contributions--e.g., less than $1. We are not sure they can even get corrective accounts in the plan set up for such small amounts.

If anyone has particular experience with truly small amounts (i.e., less than $1) and obstacles in having corrective accounts established, etc., I'd welcome any experience or insights. Thanks.

[Belgarath]

Hard to give good answers without all the facts, and there isn't necessarily a "right" answer. One of the great things about the Revenue Procedure is that although they list many "pre-approved" fixes, they are not the ONLY methods of fixing problems. I think the IRS is generally pretty reasonable about what constitutes an acceptable correction.