Excess Contributions and the 415 Limit

[msmith]

Calendar Year 401(k) Plan - deferrals are contributed throughout the Plan Year. After December 31st, it is determined that the Plan failed the ADP Test and corrective distributions were made.

For the same Plan Year, the Employer has decided to make a Profit Sharing contributions (decided after above corrections).

A colleague states that the Employer may contribute Profit Sharing over the 415 Limit to make up for the corrective distribution of deferrals that were made.

Is this possible? It seems unreasonable.

[Lou S.]

No they can not.

Employee deferrals that are refunded as part of a failed ADP test are still included in the employee's 415 limit.

[lp1965]

Just to be sure I am understanding.....Calendar year plan with deferrals and match made each pay period. For 2015, the owner deferred $24,000 (he is over age 50) and received a $7,950 match. ADP test fails resulting in a $6,000 refund to the owner (no reduction needed for the match). When calculating the maximum profit sharing contribution, the owner will be limited to $27,050. Is this correct???

[msmith]

Yes. That is my understanding of the 415 limit.

[Jim Chad]

What happens if they give him a profit sharing of $33,050 and then do the ADP test?

[Mike Preston]

You would have a violation of 415. With $65,000 in annual additions, how could it be anything else?

[msmith]

The document we use (Relius IDP) states...."the amount that would otherwise be contributed or allocation will be reduced so that the Annual Additions for the Limitation Year will equal the maximum permissible amount,,,,,"

[Tom Poje]

At the 2012 Q and A #23 ASPPA conference the following was asked
(with the usual cautionary, such IRS responses do not necessarily reflect an actual treasury position.)

Q

plan states that, if any contribution would cause the participant to exceed §415, the contribution should be reduced so that it equals the maximum permissible amount. The plan also states any excess should be corrected under EPCRS. The participant defers $17,000, and is given a matching contribution under the plan equal to 50% of deferrals, or $8,500. The plan allocates a profit sharing contribution, which under the allocation method would yield an allocation of $24,750 to Participant A. If the allocation is credited to A's account, his total annual additions exceed the §415© limit by $250. What is the correct administrative procedure? (1) The $250 should be reallocated to other participants, because the sponsor failed to operate the plan within its terms (i.e., the plan says total allocations may not exceed the §415© limit), or (2) now that there is an excess consisting of deferral and employer contributions, $166.67 in deferrals is refunded while $83.33 in match is forfeited, pursuant to the suggested correction method under EPCRS. Would the answer change if the plan did not contain language reducing any contribution that would cause a §415 excess?

Proposed answer
The plan may rely on the EPCRS procedure. All plans are required to limit annual additions to the §415© limit so that alone does not preclude using the EPCRS correction method. With the elimination of specific correction methods from the §415 regulations, the IRS intended that the EPCRS procedure would be the primary reference point for correcting §415 violations. This also would enable the participant to be entitled to a greater portion of employer contributions, and minimize the amount of the total annual addition that represents an out-of pocket contribution for the employee. Alternatively, the administrator may apply the plan language to treat the $250 of the profit sharing contribution allocated to this participant's account as an improper allocation, and reallocate that amount to the other plan participants who have not reached the §415 limit.

IRS Response
The IRS agrees with the proposed answer. This is a plan document interpretation issue.

[msmith]

Tom - would you agree if corrective distributions were made due to a failed ADP Test that the amount distributed cannot increase the Profit Sharing contribution?

Thank you for your valuable input (as always).

[Jim Chad]

What if deferrals were refunded , so the maximum PS could be put in? Would the Refunded deferrals still count in the ADP test?

[Tom Poje]

I think the IRS answer "It is a document interpretation issue certainly leaves things open.
there is nothing, as far as I know, that says "I must run the ADP test before making a profit sharing contribution"
the language in EPCRS section 6.06 says....
If an Excess Allocation resulting from a violation of § 415 consists of annual additions attributable to both employer contributions and elective deferrals or after-tax employee contributions, then the correction of the Excess Allocation is completed by first distributing the unmatched employee’s after-tax contributions (adjusted for Earnings) and then the unmatched employee’s elective deferrals (adjusted for Earnings)

that seems to imply I could play 'games'. I know my ADP failure is going to be 510.37 so I will 'over contribute' 510.37 in violation of the 415 limit...

a bit aggressive for me but...

of course, that example might only work for when you have 1 HCE as the amount refunded doesn't necessarily tie into the person causing the plan to fail ADP.

now if the document language is such (as the IRS hints it could be) that it says deferrals (and match) are counted first then you figure what profit sharing can be made up to the 415 limit, then no I would say you can't play games.

but, if for instance I was giving everyone 12.75% of pay and that caused a 415 violation I wouldn't have so much a problem with it.

but those are my ramblings, and as someone once said in response to a post by someone named 'blink the three eyed fish', "Yes but can I do it and will it be ok if I tell the IRS Blinky said so"

I'm not sure my name carries much more weight. aside from trying to include the cite for any comments I may make!

[msmith]

My document states that "the Excess Annual Additions will be deemed to consist of the Annual Additions last allocated..."

In my situation, the PS was the last allocated contribution. In this respect, I prefer to take a conservative approach - and cap the Owner at the normal 415 and make the corrective distributions for the failed ADP Test.

[msmith]

I should further state that there is clearly a paper-trail as to when the various contribution types were allocated.