Allocating extra funds

[TPApril]

Small top heavy plan has about $1,000 unallocated funds in trust which has been tracked to earnings on a 2003 profit sharing deposit that were not allocated along with the contribution. Plan sponsor cannot locate report from that year. Can this amount be allocated this year as 1) among current active participants as a forfeiture? or 2) as earnings to all remaining participants who were in the plan in 2003, based on current account balance, or 3) as earnings to all current participants, even if hired after 2003?

[ESOP Guy]

oh the questions one could ask about how this could happen......

If the amount doesn't appear to be material I would go with #3. Don't get me wrong I am not saying I can prove that is the correct answer, I am saying it is the simple answer and if the amount isn't material to the total assets and earnings go with simple.

If the amount is material I would try and see if I can allocate to the people who had balances in 2003 as earnings. Then for people this would create balances I would determine if the newly created amout is material. If it creates a $1 balance for someone for example I would not give that person the allocation and reallocate to everyone else from 2003. I would SUSPECT that is more like the right answer. It seems like most corrections the idea is to get people back to where they would be if the error hadn't happened.

My general rule is if not material go with simple and cheap solution. If material try and get people back to where they would have been if the error hadn't happend if there isn't an IRS given fix out there, and I doubt there is a IRS defined fix.

Once again only opinion, I can not cite anything other than those guiding principles as to why I would do what I would do.

And in all cases I would tell the client what I think is the right answer-- get them back to where they would have been-- an idea of the cost to do that. Then if not material give the first answer as an option, and the much lower cost of doing that. I would then recommend to them if they are uncomfortable with it all go talk to their lawyer. In the end I would make them tell me as the plan admin what they want to do after I think I have given them the tools to make an informed decision.

Not sure if that helped or not.

[TPApril]

Thanks - you didn't mention the forfeiture option at all - reason I am thinking about it is that because of the small population size, no matter what, the allocated amounts will be in the hundreds of dollars, so even if only 1% of comp, it kinda feels material to me. another thought on the forfeiture option - the owner's amount as a forfeituer will be half of what it would be if allocated as earnings, however, there is one non-owner-family inactive who was employed at the time who would miss out on his $70 if not allocated to all as earnings.

[TPAMan]

Your plan document should be pretty specific about how to allocate earnings versus contributions/forfeitures. You indicated that the "extra funds" were earnings on deposited contributions. So....allocate as earnings. I don't see a "forfeiture" option from the info you provided.

Hard part is typically determining your allocation group from 2002 and associated account basis as a starting point. ESOPguy gave some good tips on how to proceed from there. Comes down figuring out your costs, benefits and risks. Good luck.

[ESOP Guy]

I agree also, forf makes no sense based on your facts. That is why I didn't talk about that method.