Lost Earnings on Safe Harbor 401(k) Contributions

[Danny CPA]

I have a client that deposits their 3% safe harbor on each payroll each year, but there is a true-up at the end of the year. In 2013 (a calendar year plan), there were 2 issues:

1. They over-deposited on the safe harbor by $5,000 for a key employee (Employee #1) because they did not stop at the $255,000 compensation limit.

2. They re-hired an employee (Employee #2) and did not realize she was eligible for the plan again, so they did not deposit any safe harbor money for her.

They also made a profit sharing contribution for 2013, which was deposited in February 2014. The profit sharing contribution for Employee #1 was $7,000, so the client only deposited $2,000, and wants to transfer the $5,000 that went into the safe harbor bucket to the profit sharing bucket.

The custodian is arguing that there should be lost earnings on the profit sharing for all of the other employees since the Employee #1 got $5,000 of his deposited early, and that Employee #2 should receive lost earnings since her contribution was not deposited at the same time.

Both of these were mistakes by the employer, and the final contribution in both instances was made timely. Additionally, the document says that "Unless otherwise provided by contract or law, the Employer may make its contribution to the Plan for a particular Plan Year at such time as the Employer, in its sole discretion, determines."

I don't believe that any lost earnings should be made based on the language in the document, but I can't find any support one way or the other. Does anyone have sort of support one way or the other?

Thanks

[K2retire]

Because the person who got the early deposit is an HCE, it could be construed as discriminatory. But the custodian should not be making the decision about how to correct the error, unless they are also a plan fiduciary.

[Bird]

I agree. The issue is discrimination, not lost earnings. (And the custodian should stay out of it unless there is some specific authority for being involved.) I'd probably scold and warn them and move on.

[QDROphile]

The sad reality is that a lot of small plans (and others) rely on a bundled service provider for all advice about maintaining the plan because the advice appears to be free. The advice is often worth exactly what is paid for it and it often makes the provider a functional fiduciary, which is a problem both for the provider and the named fiduciary.

[BG5150]

Did the custodian say the correction MUST be made? Or is it their suggested course of action?

How much would the lost earnings be? Is it a small price to pay should the plan ever get investigated? Hey, DOL, look. We goofed in favor of an HCE/key employee, but made up for it.

[Danny CPA]

We are talking about maybe a hundred of lost earnings in total. The remaining deposit was made in early January 2014. So really you are talking about interest on a month. They are refusing to transfer any funds between the sources without lost earnings.

[BG5150]

Tell them if they won't do it, you'll find someone who will.

My guess is they are a "directed" record keeper and should do as they are directed, as long as there is no direct contradiction to the regs.

[Kevin C]

It sounds like calculating the lost income would require time of a much higher value than the lost income. How about telling the custodian to send you their calculation of the lost income? They want to be a fiduciary, so let them be one. If their lost income calculation is less than what your time would cost to deal with the matter, the employer may decide it's easier to just deposit the lost income.