Employee defers to plan before eligibility requirements are met

[mming]

The employer somehow allowed an NHCE to begin making deferrals to their 401(K) plan about four months before that employee met the eligibility requirements. The employer even made a quarterly match for the employee before her date of entry. Should the employee be given back the deferrals that were made before her DOP and revise her W-2 (consider it a contribution in error)? A 402(g) violation did not occur, so it can't be treated as an excess deferral. It happened to an NHCE, so it seems it shouldn't be treated as an excess contribution. What is the best way to handle this? Would giving the match back to the employer also as a contribution in error be advisable (overall match made throughout the year for her exceeded what she should have been allocated)? All help much appreciated.

[Guest]

First thing to do is check the plan document. Our standardized plan document requires that any contributions made on behalf of ineligibles be forfeited, even deferred wages.

rhp, I was unaware anyone at the IRS took the position you describe. Was that suggestion made in just one circimstance?

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Dan Smith

[Guest rhp]

Are you talking about a 1999 plan year situation or has this occurred in 2000? How much money is at issue? These cases are very fact specific. We have had the IRS suggest that this is a mistake of fact and recommend refunding the deferrals and issuing a W2C to the employee [for a 1999 year]. The match would be used for other participants.

[Kirk Maldonado]

There is a risk that the IRS would attempt to disqualify the plan because of this. You should consider submitting the plan to the IRS under the VCR program. However, you probably need more facts to make a final determination on this issue.

[mming]

Thanks everyone for your responses.

rhp, it happened during PYE 12/31/99 and fortunately the extra deferral amount is only about $400 (associated match is about $200).

Doc is silent re deferrals for ineligibles.