Deferral % exceeds max in plan doc

[Guest pinsall]

I have a plan which has a max deferral % of 10%. Two participants exceeded 10% , one an HCE, another an non-HCE. They are not over 25% 415 limit, however.

The k feature was added during 1999

Does anyone see a problem with retroactively amending max deferral % to max allowed by law effective with 1/1/99?

If you do see a problem one can certainly amend in the future but how do I correct current situation? Refund deferral in excess of 10% plus interest? How would this be classified on 1099 reporting?

This may be a ECPRS issue

Thanks

[bzorc]

I have seen this handled in a couple of different ways:

1. Allow the deferral, as it does not exceed the 415 limit for the participant. Amend the plan going forward to allow a higher rate of deferral (not retro!). As an aside, a 10% max rate seems low, unless the company has a generous match/profit sharing feature, or has a partner money purchase plan.

2. Refund the excess over 10% (with associated gain/loss), handled and reported as a 415 refund (Code E). I never saw eye to eye with my superiors on this one, as there in real life was no real actual 415 violation.

3. Say oops, a couple of people were over in the first year (set up pains), we made the adjustments, it won't happen again....

[Guest]

There is an EPCRS issue here. To do a self-correction without IRS involvement (APRSC), the correction cannot be a plan amendment. Only Walk-in CAP allows correction by a plan amendment.

[davef]

FYI, the IRS addressed this issue in Q&As that it answered at the 1999 ASPA meeting. Here is their answer under Q&A 42:

"Refunding from the plan is NOT an acceptable APRSC solution, although it might work under VCR. The money should probably be forfeited and used in whatever way other forfeitures are used, with the employee being made whole outside the plan. However, we strongly argue that the 'mistake of fact' argument does not apply to these contributions!"

Food for thought.

[Alf]

Since it is not a cutback, couldn't you amend retroactively back to 1999 because it is within the remedial amendment period?

[MWeddell]

Responding to the above post, I don't think that'd work. Given the retroactive nature of the suggested amendment, I think one could conclude that the effective availability of the higher deferral limit was only for these two employees. Because one of them is highly compensated, that'll violate Treas. Reg. 1.401(a)(4)-4.

Hence, even if one thought the retroactive amendment was generally permissible (we've had lively debates on that topic I recall), it won't work here.

[Alf]

Responding to the above post, there won't be a 401(a)(4) problem. Given the nature of the administrative error, I think one could conclude that the effective availability of the higher deferral limit was available to all employees.

Hence, a retroactive amendment should be permissible here.