Incorrect Profit Sharing Allocation

[52626]

the employer maintains a 401(k) with a permitted disparity profit sharing allocation. For the 2013 Plan Year a Profit Sharing Contribution was made, however, the recordkeeper used the wrong compensation. This resulted in some participants receiving to much of an allocation, while others did not receive enough.

The platform has recommended pulling the excess dollar amount from each participant and allocating it to the participants who received the incorrect amount. Then using the DOL calculator, calculate the "lost" income to make the participant whole.

Does this correction process seem ok. To me, the entire transaction should be reversed and the shares purchased for the incorrect deposit pulled from EVERYONE's account. If the cashed raised due to the sale of the shares is less than the actual contribution, then the employer would need to contribute the difference. Then the correct amount is allocated to all participants. If the sale of the shares was greater than the contribution amount, the excess is allocated pro rata to all participants.

Then the employer would use the DOL calculator to determine the lost income from the date the deposit was originally made to the date the correction was made.

Thoughts

[Bird]

I think the "perfect" solution, in terms of fixing the original problem, is to reverse the original transaction and re-run the allocations and see where everyone winds up. I think that's what you're saying. The employer will have to indemnify the investment company for any additional funds needed to make everyone whole.

But that can get difficult, especially if there have been exchanges, and more so if there have been distributions.

At some level you have to be practical, and if that is not practical, then the proposed solution sounds reasonable to me.

[BG5150]

How many people are we talking about?

[QDROphile]

According to Rev. Proc. 2013-12, the VFCP calculator is is available only if other reaonsoable methods are not. only

[ESOP Guy]

I would agree with QDROphile here. I would not use the DOL calculator to compute the earnings.

Back when I did these kinds of corrections we would use the actual earnings. You should be able to get the fund price of the day the additions were deposited-- so you know how many shares anyone should have bought that day, any dividends paid and reinvested. So you should be able to figure out how many shares of each fund by person that needs to be bought for them.

I would add for the people you take the excess from them you could compute the numbers of shares that ought be sold, if those shares got dividends reinvested and so forth.

In short you should be able to compute how to put everyone back to where they would have been if the mistake wasn't made.

They key is compute the change in shares not dollars and you should end up with the right ending value for everyone.

If there are hundreds of people (or more) that might not be practical but that is how I did it back when I worked daily valued plans. Although we at times did do these calculations for 100s of people. We just worked on automating the process.