Too much match from Too much Compensation

[Mr Bagwell]

Employee received too much match from too much compensation.  The calculation of the match did not stop at 265,000.  Employer thought the 265,000 was only for the safe harbor calculation....lol.  The employee received his 2% match on 444,000...

I need to remove the extra match and place into unallocated acct.

The employer was questioning if they could reallocate the extra match as an employer non-elected contribution for 2016?

Is this permissible?

(I didn't use the term forfeiture because I don't think this is a forfeiture situation)

[rocknrolls2]

Mr. Bagwell,  I am assuming that the account is not a forfeiture account but simply a non-allocated account.  The name given should not matter at the end of the day.  Another possible name is a suspense account.  Regardless of what you call it, the IRS basically requires almost all dollars in a defined contribution plan to be allocated among all participants as of the end of each plan year.  In order to take less than fully vested matching contributions out of the non-allocated or suspense account and treat them as qualified nonelective contributions, the plan document would need to be amended to provide that a contribution must be nonforfeitable at the time it is allocated to a participant's account NOT at the time the contribution is initially made.  If the plan is amended in this manner, and based on the IRS proposed regulations, such an amendment could be given retroactive effect, you could take amounts out of the non-allocated or suspense account and allocate it as a qualified nonelective contribution to the accounts of certain non-highly compensated participants.

[Kevin C]

You have an excess allocation that can be corrected under EPCRS. 401(a)(17) failures are addressed in Rev. Proc. 2016-51, Appendix B 2.06, which sends you to Section 6.06(2).  If this is from 2016, you should be able to correct under SCP.

 

Quote

6.06(2) Correction of Excess Allocations. In general, an Excess Allocation is corrected in accordance with the Reduction of Account Balance Correction Method set forth in this paragraph. Under this method, the account balance of an employee who received an Excess Allocation is reduced by the Excess Allocation (adjusted for Earnings). If the Excess Allocation would have been allocated to other employees in the year of the failure had the failure not occurred, then that amount (adjusted for Earnings) is reallocated to those employees in accordance with the plan's allocation formula. If the improperly allocated amount would not have been allocated to other employees absent the failure, that amount (adjusted for Earnings) is placed in a separate account that is not allocated on behalf of any participant or beneficiary (an unallocated account) established for the purpose of holding Excess Allocations, adjusted for Earnings, to be used to reduce employer contributions (other than elective deferrals) in the current year or succeeding year. While such amounts remain in the unallocated account, the employer is not permitted to make contributions to the plan other than elective deferrals. Excess Allocations that are attributable to elective deferrals or after-tax employee contributions (adjusted for Earnings) must be distributed to the participant. 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). 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). If any excess remains, and is attributable to either elective deferrals or after-tax employee contributions that are matched, the excess is apportioned first to after-tax employee contributions with the associated matching employer contributions and then to elective deferrals with the associated matching employer contributions. Any matching contribution or nonelective employer contribution (adjusted for Earnings) which constitutes an Excess Allocation is then forfeited and placed in an unallocated account established for the purpose of holding Excess Allocations to be used to reduce employer contributions in the current year and succeeding year. Such unallocated account is adjusted for Earnings. While such amounts remain in the unallocated account, the employer is not permitted to make contributions (other than elective deferrals) to the plan.

 

[BG5150]

This is the part many folks miss:

While such amounts remain in the unallocated account, the employer is not permitted to make contributions to the plan other than elective deferrals.

Side note:  they CANNOT use it for fees.

[Mr Bagwell]

Thanks.  That is what I was looking for.