ER Disc. Match for Owners were not made (in error) requirements?

[Guest JP-39]

Hi:

I wanted to see if anyone has ever encountered this situation:

Plan Sponsor did not make discretionary ER contributions for the Owners in 2008 because the Plan was top heavy. In 2011, Fidelity told them that they needed to make ER discretionary contributions for the owners for 2009 and 2010 because these years were "Not Top Heavy". The Plan Sponsor will be funding the 2009 contribution at the end of this year and the 2010 contribution at the end of next year.

There is no mention of this provision in the plan document or adoption agreement, does anyone know if there is guidance/authority to support what the plan sponsor is about to do?

Would the 2009 financial statements need to be recalled and restated?

How long does the Plan Sponsor have to fund such contributions?

Does this impact the ADP/ACP discrim. testing? Would there be any excise taxes involved?

Thanks in advance.

[QNPG]

Hi:

I wanted to see if anyone has ever encountered this situation:

Plan Sponsor did not make discretionary ER contributions for the Owners in 2008 because the Plan was top heavy. In 2011, Fidelity told them that they needed to make ER discretionary contributions for the owners for 2009 and 2010 because these years were "Not Top Heavy". The Plan Sponsor will be funding the 2009 contribution at the end of this year and the 2010 contribution at the end of next year.

There is no mention of this provision in the plan document or adoption agreement, does anyone know if there is guidance/authority to support what the plan sponsor is about to do?

Would the 2009 financial statements need to be recalled and restated?

How long does the Plan Sponsor have to fund such contributions?

Does this impact the ADP/ACP discrim. testing? Would there be any excise taxes involved?

Thanks in advance.

If the document states that the employer profit sharing contribution is discretionary, how could Fidelity tell them that they're required to make a contribution for any year that's not top heavy and the KEYs (not HCE) are not contributing?

Employer profit sharing contributions are tested under 401(a)(4) - unless it is a design-based safe harbor formula. ADP/ACP is the exclusive means of satisfying the 401(a)(4) non-discriminatory requirement for 401(K) deferrals and 401(m) match.

I don't see how an excise tax would be due if there is no required contribution (not subject to Code Section 412) or stated in the document.

Maybe you haven't listed all of the facts or someone has given you bad advice? Hope this helps.

[Bird]

This doesn't make a whole lot of sense, although I can see one scenario where the results would be the same and maybe this is what was meant:

The plan was top heavy in 2008, and the owners made deferral contributions, triggering top heavy contributions for non-keys. The plan would have to say that keys do not get TH contributions if in fact they did not. These top heavy contributions aren't exactly discretionary although that's how they would be treated once in the plan.

The plan was not top heavy in 2009 and 2010 and discretionary contributions were made for non-keys, perhaps under the mistaken impression that they were required, so they are in fact discretionary PS in every sense of those words and the owners should share in them. Why there could have been this misunderstanding and why there wasn't more oversight on this I don't know.

I'd want to get this confirmed before I gave any answers. (But based on how this was presented, it has no impact on the ADP/ACP testing.)

[Guest JP-39]

I got some more information from talking to the client and trustee.

@QNPG – It is discretionary, it really wasn’t the trustee that was seeking to make the additional contributions. It was the Plan Administrator/Owners. At their discretion, employees receive a discretionary match equal to 3% of gross compensation. In years where the Plan is Top Heavy, the Owners will not receive an allocation… VV..

Apprarently the Trustee considers these as missed contributions and has instructed the Plan Sponsor to address the issue under the SCP. I agree that this could qualify under the SCP. So according to Rev. Proc. 2008-50, they have up until the last day of the 2nd plan year following the plan year for which the failure occurred.

(Using random #s) Therefore, there will $25k remitted to the Plan in ER discretionary contributions on or before 12/31/2011 and $20k remitted to the Plan on or before 12/31/2012. Will these actions affect say the ACP testing that was performed in the past?

Would the discretionary match be subject to the $245k maximum compensation limit that is used for the 3% match calculation?

For a Plan that applied under the VCP, I disclosed additional information in the footnotes.

In this case, they are self-correcting via the SCP, which does not require any formal filing. I am wondering if anyone has disclosed additional information for a Plan going down the SCP route.

Your input is appreciated and thanks in advance.

JP