Included Excluded Employees

[goldtpa]

Employer has 5 ee's who were supposed to be excluded. Plan passes all of the testing. Unfortunately 3 of the excluded employees, were included. What do you do? Do the 3 employees who were included forfeit their benefit? Or do the 2 employees who were excluded now get included?

Thanks.

Please provide regs if you can.

[Jim Chad]

Do I understand you correctly? 3 non eligible employees received a benefit. What benefit?

[12AX7]

Also, what does the Plan Document say about such matters?

[goldtpa]

Jim, yes 3 excluded ee's recvd a psp contribution for several years. I just found out that 1 even recvd a distribution of a benefit he was not entitled to. 12ax7, I dont know what the plan says. This is a new client for me and I have not recvd the plan docs yet.

However I believe that since they allowed excluded employees to recv a psp contribution, I believe they have to now give a psp contribution to the 2 excluded ee's. Is that right? I just need the regs to show them. Thanks.

[Tom Poje]

I haven't seen this addressed in regards to profit sharing, but logically the same rules should apply as if you allowed someone to defer before being eligibile.

EPCRS appendix B section 2.07 Correction by amendment.

(3) Early Inclusion of Otherwise Eligible Employee Failure. (a) Plan Amendment

Correction Method. The Operational Failure of including an otherwise eligible employee

in the plan who either (i) has not completed the plan’s minimum age or service

requirements, or (ii) has completed the plan’s minimum age or service requirements but

became a participant in the plan on a date earlier than the applicable plan entry date, may

be corrected by using the plan amendment correction method set forth in this paragraph.

The plan is amended retroactively to change the eligibility or entry date provisions to

provide for the inclusion of the ineligible employee to reflect the plan’s actual operations.

The amendment may change the eligibility or entry date provisions with respect to only

those ineligible employees that were wrongly included, and only to those ineligible

employees, provided (i) the amendment satisfies § 401(a) at the time it is adopted, (ii) the

amendment would have satisfied § 401(a) had the amendment been adopted at the

earlier time when it is effective, and (iii) the employees affected by the amendment are

predominantly nonhighly compensated employees.

(b) Example

Example 27:

Employer L maintains a § 401(k) plan applicable to all of its employees who have at least six

months of service. The plan is a calendar year plan. The plan provides that Employer L will make

matching contributions based upon an employee’s salary reduction contributions. In 2007, it is

discovered that all four employees who were hired by Employer L in 2006 were permitted to make

salary reduction contributions to the plan effective with the first weekly paycheck after they were

employed. Three of the four employees are nonhighly compensated. Employer L matched these

employees’ salary reduction contributions in accordance with the plan’s matching contribution

formula. Employer L calculates the ADP and ACP tests for 2006 (taking into account the salary

reduction and matching contributions that were made for these employees) and determines that the

tests were satisfied.

Correction:

Employer L corrects the failure under SCP by adopting a plan amendment, effective for employees

hired on or after January 1, 2006, to provide that there is no service eligibility requirement under the

plan and submitting the amendment to the Service for a determination letter.

not sure what the effect of 'many years' would have.

[Kevin C]

However I believe that since they allowed excluded employees to recv a psp contribution, I believe they have to now give a psp contribution to the 2 excluded ee's. Is that right? I just need the regs to show them. Thanks.

Maybe not. You need to read through the correction by plan amendment sections of Rev. Proc. 2008-50. Start with Section 4.05 and follow where it leads.

[EBDI]

I have a similar question. This plan has immediate entry and the only requirement is age 19. One participant was reported as age 19 when in fact she was 15. A profit share contribution was made for her for the 2011 plan year. I think an amendment allowing her to enter the plan would correct the problem. Others feel that because she is so young, the funds should be forfeited. The plan document does not have any guidance. Anyone have an opinion?