Profit sharing contribution deposited, but plan doesn't allow

[AndrewZ]

A client's prior TPA amended out profit sharing provisions from a safe harbor matching 401(k) plan, as she thought allowing for profit sharing would create a top heavy minimum requirement (even if there were no allocations of profit sharing or forfeitures). The plan doesn't allow for any additional matching contributions.

The client had deposited $30K throughout 2014 toward profit sharing (in addition to the SH match).

The plan document provides that contributions may be returned to the employer within 1 year due to "mistake of fact," but some of the deposits are now over one year ago.

Does anyone have any suggestions for a reasonable way of dealing with this? What about the following?

• Place the contributions into a suspense account and take a 2014 corporate deduction, then amend the plan for 2015 to allow (understanding the potential issue with mid-year amendments for safe harbor plans) and allocate them in 2015 (including them in 2015 415 limits)
• Return contributions made in the last year as a "mistake of fact," an return the prior ones as prohibited transactions (paying excise tax)?

Thanks.

[Lou S.]

How do you deduct unallocated contributions made in 2014 but allocated based on 2015?

I'm not sure you have a mistake of fact.

Maybe not the best solution but what about retroactively amending back in PS contrib. to 1/1/4 based on allocation conditions in the prior document? This solution might work better with an EPCRS submission to go along with the proposed correction. I doubt the IRS would have much of a problem with that correction method as elimination of PS in the first place looks like a mistake by prior TPA.

[AndrewZ]

Lou,

Thanks.

I was thinking in the logic that plans can allow 415 excess amounts to be held in suspense and reallocated in the next year - but I guess those are still earmarked to participants based on the year contributed.

I'm not sure it's a mistake of fact either.

I also thought about a retroactive "corrective" amendment, and recommending that we submit under EPCRS. Since no profit sharing provisions are in the current document, I don't know if it was a pro-rata or cross-tested allocation previously (I'll try to get a prior document to see if cross-tested, or just allocate pro-rata). It does have a last-day requirement for forfeitures (even though it states forfeitures are used to reduce SH match), which is probably a carry-over from the old document's profit sharing provisions.

Furthermore, there are 2013 profit sharing forfeitures to reallocated in 2014 which we currently can't do, so we could further argue that the amendment was necessary to fix that.

[ESOP Guy]

As a rule I have found where you can show the error looks like confusion and not something else and you are offering to give the rank and file money the IRS will approve just about any reasonable correction.

It looks like you have a failure to follow the document so I think a VCP filing is the only way to know you correction is good and acceptable.

[AndrewZ]

Thanks, ESOP guy. I was hoping for something simpler than VCP/EPCRS, but no such luck!

[Lou S.]

You can self correct and hope for the best but this doesn't sound like it falls under SCP. VCP sounds more likely.

[Kevin C]

Would your corrective amendment meet the requirements of 1.401(a)(4)-11(g)? EPCRS is not available for corrections that can be done under the Code or Regs. (Rev. Proc. 2013-12, Sec 6.08).

[JJRetirement]

I believe that the only retro amendments that are permitted under self correction to fix operational failures are allowing loans or hardships that were made but weren't permitted under the document, early entry of otherwise eligible employees and correction of a 401(a)(17) failure by providing for additional allocation. See section 4.05 of Rev. Proc 2013-12 and Appendix B section 2.07.

[AndrewZ]

Correct, it wouldn't be an amendment allowed either under the regs or EPCRS' self-correction program.