Deferrals withheld from Excluded Compensation

[401(k)athryn]

The plan's definition of compensation was the safe harbor 414(s) safe harbor definition that excludes: reimbursements or other expense allowances, fringe benefits (cash and noncash), moving expenses, deferred compensation, and welfare benefits. The plan is deferral only, but deferral percentages were applied to all compensation. As of November 1st, the plan has been amended to be W-2 only, no exclusions and everything is being done properly.

I need to fix the error for the period from January through the end of October. The IRS Fix-It Guide clearly states that we can distribute the deferrals that were withheld on excluded compensation and treat as excess deferrals. My question is: If I have these deferrals distributed before year-end, will the employees be able to bump up their deferrals and still reach the maximum of $18,000/$24,000? I am not sure because, if they net the maximum amount into the plan, their W-2 will show deferrals exceeding the 402(g) limit. But is this okay because they will also be showing the distribution of excess deferrals in the same year?

Thank you!

Kathryn

[ETA Consulting LLC]

I'm not sure this isn't splitting hairs. I'm not sure how the plan reads and don't have access to a BPD at the moment. I would begin with the following premise and then see if the plan's language contradicts it (remember interpretations must merely be reasonable; or not arbitrary and capricious): The plan limits deferrals as a certain percentage of Compensation (i.e. 100% or lower). Compensation is defined to exclude certain amounts. At year end, eligible Compensation for deferral purposes is $18,000. The participant deferred $18,000.

What's the problem?

You're interpreting the plan to say that you cannot actually defer dollars from amounts that are from those sources (i.e. Overtime). Would it be reasonable to say deferrals are limited to eligible Compensation for the year (and eligibile Compensation merely excludes those amounts?)

It's basically applying the same methodology for making deferrals after your Compensation actually exceeds the 401(a)(17) limit.

Again, I don't have current access to a document and asking if this would be a reasonable interpretation of the way your plan is written.

Also, verify who has the responsibility for interpreting the plan's provisions.

Good Luck!

[401(k)athryn]

The plan document excludes the fringe benefits for purposes of deferrals. The IRS Fix-It guide is very clear that any deferrals from this compensation should be distributed as excess deferrals. If the IRS has a specific correction, I always do it. And yet, I see your point. Why require these employees to take distributions just so that they can maybe turn around and put the same amount back in from eligible compensation? It seems unnecessary and the end result is almost the same.

Still struggling with this one...

Any other opinions?

[BG5150]

I would think that putting in the deferrals the first time was failure to follow deferral election.

Say my pay for the period is $1,000, with $100 fringe benefits. My election say 10%. If using all the comp, then it's $100 of deferral. per the document it should only be $90. They withheld $10 too much.

[ETA Consulting LLC]

And yet, I see your point. Why require these employees to take distributions just so that they can maybe turn around and put the same amount back in from eligible compensation? It seems unnecessary and the end result is almost the same.

That wasn't my point. My point was the ensure you read the plan's language carefully and determine if your interpretation is the only reasonable interpretation.

Just a random case to illustrate a need to read the plan: Suppose you have a plan provision that limits deferrals to 10% of Plan Compensation per year. Let's also suppose that for the first 6 months a participant has deferred zero. This would mean that such participant may defer up to 20% (or whatever) for each payroll until his annual amount equates to 10% of his year to date Plan Compensation. Would you say this is a reasonable interpretation of that provision?

My point is not on the IRS's position or anything other than reading the plan to ensure there is a legitimate failure to follow the plan's terms regarding your provision in question.

Good Luck!

[401(k)athryn]

Yes, that is a reasonable interpretation in your example, but completely different than my situation.

We are moving forward with the distributions. The employees will still have a few weeks or maybe more to increase their deferrals to make up the difference, if they so choose.

Thanks everyone!

[Mike Preston]

To put your mind at ease, search RP 2016-51 for the following phrase:

For qualification purposes, an Excess Allocation that is corrected pursuant to this paragraph

is disregarded for purposes of §§ 402(g) and 415, the ADP test of § 401(k)(3), and the

ACP test of § 401(m)(2).

Does that answer one of your questions?

RP 2016-51 has very few references to "excess deferrals." It prefers "excess allocations."

[401(k)athryn]

Thanks, Mike! That does help!