Deferrals allowed on ineligible compensation

[Belgarath]

I'm not entirely certain exactly where this falls - I couldn't necessarily find where this is specifically addressed.

Plan excludes certain compensation in the form of a fringe benefit or two. However, the employer didn't monitor this, and allowed deferrals on this compensation.

Clearly this should be correctable under RP 2008-50. However, I'm not certain if it is specifically addressed. 5.01(3)(a)(i) might cover it, but I'm not sure if this counts as a deferral in excess of the "maximum" allowed in the plan. Alternatively, I suppose it could be considered an "excess allocation" under 5.01(3)(b), but that doesn't see to quite "fit."

How would you correct this? Let's assume that ADP/ACP testing still passes if these amounts are refunded. Should they just be refunded with interest, or is the a better or more correct method? We are talking about trivial amounts, so I'd certainly think SCP is allowable, rather then using VCP.

[BG5150]

I would refund the money to the participants. Not eligible for rollover. No withholding required.

From the IRS site on fixing plan mistakes

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.

[Belgarath]

Gracias.