Profit Sharing Contribution - Operational Failure (suggestions for correcting?)

[BeanCounterBlues]

Plan has last day rule for profit sharing allocation (plan is 401k w/ match, normally deposits profit sharing annually). 2011 census termination dates were omitted by client who completed census for TPA. TPA inquired as to existence of missing termination dates from 2011 census at the time the 2011 work was being processed, and was adivsed by client that there were none (eg TPA did ask the question). Client is relatively small group w/ little turnover from year-to-year.

I really don't think this omission was deliberate on the part of the client, the person who completed the census is very diligent but has been dealing w/ some medical issues and seems to overlook minute details (eg lack the capacity to handle) sometimes (thus the TPA goes the extra mile and asks lots of questions, but this still got missed). This is probably irrelevant but I wanted to point out that the issue was not a result of carelessness.

2011 profit sharing contribution was timely allocated, and client deposited to plan. Note that the allocation was a percentage of pay, and not a flat dollar amount allocated amongst elig participants. In other words, the allocation to the participants who really were supposed to receive a 2011 allocation are not affected.

Fast forward to 2012 plan year. Three individuals that should have had 2012 compensation and hours based on 2011 census data, did not. TPA inquires. TPA learns that those individuals terminated before the end of the 2011 plan year. Therefore, those three should not have gotten 2011 profi sharing contributions.

Two of the three were NHCE's; one of the three is HCE.

Does anyone have any suggestions as to how to correct this? My inclination is to leave the two NHCE contributions alone, and suggest that the client distribute the contribution that was made to the HCE.

TPA has seen errors like this (eg ones that TPA couldn't have known about through reasonable procedures) get caught on IRS audit, but never one where there has been favor to an HCE. In the cases where the error was immaterial to plan testing (eg this problem doesn't create a 2011 410b failure etc) and the contribution error was in favor of the NHCE, the IRS has allowed the money to stay in the plan even though the terms of the plan were technically not followed.

TPA is not trying to suggest that these kinds of failures are "okay." Trying to find a cost effective way of fixing the problem without ticking off NHCE's by pulling $ out of their account, etc. and also one that would be likely to be acceptable to IRS. Does anyone have experience w/ this type of problem?

Thanks for any help.

[Jim Chad]

I hate to be a pain. But even though they are thinking percentage of pay, I believe Profit sharing is always a flat dollar. If my thinking is correct, the only way to make this right is to take away from all 3 and reallocate to everyone else. What does everyone else think? Am I all wet (again)?

[Bird]

I hate to be a pain. But even though they are thinking percentage of pay, I believe Profit sharing is always a flat dollar. If my thinking is correct, the only way to make this right is to take away from all 3 and reallocate to everyone else. What does everyone else think? Am I all wet (again)?

I agree with you. I don't think it is that easy.

I can't say I handle these but am inclined to think that the IRS wouldn't really object to leaving it as is; try to sell it on the intention of the same percentage for all and no one else being harmed as the contribution would have been that much lower.

[Tom Poje]

you might read

http://benefitslink.com/modperl/qa.cgi?db=qa_plan_defects&n=137#.UUiZJhw4tqUhttp://benefitslink.com/modperl/qa.cgi?db=qa_plan_defects&n=137#.UUiZJhw4tqU

this goes back to 2000 and refers to APRSC (the old EPCRS terminology) which is today's SCP