profit sharing contribution didn't follow document terms

[K2retire]

We have a new client with a two step Integration formula up to 100% of the Taxable Wage Base. As the client was describing their contribution formula to me, it was clear that they were calculating it wrong. They have been allocating 6% to everyone, with an additional 6.2% on amounts above the taxable wage base. Their bundled service provider apparently never checked the calculations or provided any guidance on how it was supposed to be done.

Looking at their allocations, I can verify that it has been done wrong for at least 3 years, so it's no longer eligible for SCP.

I don't see anything in EPCRS that addresses how to fix an allocation that does not follow the terms of the document, or that exceeds the maximum allowable Integration percentage. Do they get to choose whether to take away the excess, or deposit more for those below the Integration level? Is there some other option that I'm not thinking of?

[ETA Consulting LLC]

Well, you have already identified the issues and they're obvious. Failure to operate according to plan terms by providing a contribution not reflected in the document. Also, the contribution provided is not a uniform allocation formula and likely failed non-discrimination that wasn't corrected within 12 months of the following year.

Just file VCP; the likely correction would be an allocation of an additional half-percent of compensation to everyone below the TWB.

I think you've considered it all from your analysis.

Good Luck!

[rcline46]

Oh Wow! I think the 6.2% excess went away with TRA 86.

We did a VCP filing on an almost identical situation two years ago. Our solution was to remove the excess contribution (and earnings) from those affected and put it into a forfeiture account. It was approved by the service. You cannot just give 1/2% more to those under the wage base because that does not fix the excess allocation.

Well, if you gave 1/2% more to ONLY those who did not exceed the wage base, and then 'shifted' enough of the 6.2% excess, but then the excess would likely not become 5.7% consistently for all. I think only the take away works.

EPCRS says correct all years - but I don't think you are going to get 24 years of records.

[K2retire]

Oh Wow! I think the 6.2% excess went away with TRA 86.

Well that explains why I had never heard of it, since I didn't get into this business until a decade or so later than that!

[ETA Consulting LLC]

You cannot just give 1/2% more to those under the wage base because that does not fix the excess allocation.

Well, if you gave 1/2% more to ONLY those who did not exceed the wage base, and then 'shifted' enough of the 6.2% excess, but then the excess would likely not become 5.7% consistently for all. I think only the take away works.

That is the point. Mathematically, you would provide contributions to each employee to the resultant amounts will be consistent with the uniform allocation formula. It won't be as simple as providing everyone 1/2 a percent, but it'll be close.

You make a good point.

[ESOP Guy]

I am almost afraid to ask this but....

Did they make this mistake because they have been following the terms of their document?

If so, does that mean it hasn't been restated since those provision could be used? Drafted wrong?

Oh the questions one could ask and fear the answer to them.