Match based on incorrect compensation

[oldman]

We have a client that used W-2 Wages (excluding Safe Harbor Fringe Benefits) as contribution compensation. In 2011 and 6 months of 2012, cell phone reimbursement was inadvertently included in compensation in applying employer matching contributions. This is an operational error and would the correction be that the affected participant accounts must be reduced by the overage, adjusted for earnings, and then reallocate or place in an unallocated account (suspense account, I.e., forfeiture account) and use to reduce future employer contributions. NOTE: No further employer contributions can be made to the plan until the suspense account is liquidated)?

[12AX7]

I didn't realize that employer provided cellphones was on the list also. What you're describing is the correcton for excess alloatons from EPCRS. You seem to be on the right track.

[oldman]

Thanks for your response to the correction method for handling employer contributions based on ineligible compensation. Question is what would be the appropriate remedy in addressing elective deferrals contributed to the plan based on compensation inclusive of cell phone reimbursement?

[BG5150]

Question is what would be the appropriate remedy in addressing elective deferrals contributed to the plan based on compensation inclusive of cell phone reimbursement?

One of the corrections is to distribute the inadmissible deferrals to the participant (plus earnings). Taxable, not eligible for rollover treatment. I do not think the 59 1/2 penalty applies.

[12AX7]

BG, I don't remember seeing that in EPCRS, but the method sounds reasonable. I think this was to be one of the expanded provisions in the next version of EPCRS.

[oldman]

Thanks to both of you for your prompt response!

[BG5150]

BG, I don't remember seeing that in EPCRS, but the method sounds reasonable. I think this was to be one of the expanded provisions in the next version of EPCRS.

I couldn't find it in EPCRS now, wither. But it is in the "Fixing Common Plan Mistakes on the IRS website:

http://www.irs.gov/Retirement-Plans/Fixing...tribution-Plans

Compensation that should have been excluded

Including too much compensation to determine plan contributions will result in excess employer contributions. To correct the excess, the plan sponsor should:

distribute excess elective deferrals, plus earnings, to each affected participant, and

forfeit excess discretionary contributions according to the method required by the plan document. The plan terms will require the sponsor to either:

reallocate the forfeitures to plan participants based on the correct compensation, if appropriate, or

hold the forfeitures in an unallocated account to reduce future plan contributions.

[12AX7]

There you go. Gotta love it when IRS gets it right!