SH Match not made for HCEs only

[RTB]

For 2015 calendar year Plan, my client chose to put the max. away for the HCEs between deferrals, SH Match (enhanced formula) and discretionary PS contribution.  They do not pay their ER contributions until September of the following year (9/2016).  

Also, in anticipation of terminating the Plan on 6/15/2016, they amended the plan to eliminate the SH Match effective 1/1/2016 and all appropriate amendments and notices were given to participants in November, 2015.  Ultimately, all assets were distributed prior to 12/31/2016.

When it came time for them to make the 2015 ER contribution in September, 2016, they didn't have enough money to contribute for themselves, so they just funded the SH Match and PS discretionary contributions for the NHCEs ONLY, and not themselves (I advised against this, so it was their decision, not mine!)  The 2015 5500SF and Corp. tax return were both filed using the reduced deduction for contributions made to the NHCEs only.

How do I solve this?  They now have contacted an attorney to "tie up loose ends" for the company, and it seems they are looking to somehow pin me to the wall for it!

Thanks for any help!!!

[ETA Consulting LLC]

What, exactly, are you trying to solve?

 

[K2]

It's not clear what you're asking.

 

[RTB]

2 hours ago, RTB said:

 

For 2015 calendar year Plan, my client chose to put the max. away for the HCEs between deferrals, SH Match (enhanced formula) and discretionary PS contribution.  They do not pay their ER contributions until September of the following year (9/2016).  

Also, in anticipation of terminating the Plan on 6/15/2016, they amended the plan to eliminate the SH Match effective 1/1/2016 and all appropriate amendments and notices were given to participants in November, 2015.  Ultimately, all assets were distributed prior to 12/31/2016.

When it came time for them to make the 2015 ER contribution in September, 2016, they didn't have enough money to contribute for themselves, so they just funded the SH Match and PS discretionary contributions for the NHCEs ONLY, and not themselves (I advised against this, so it was their decision, not mine!)  The 2015 5500SF and Corp. tax return were both filed using the reduced deduction for contributions made to the NHCEs only.

How do I solve this?  They now have contacted an attorney to "tie up loose ends" for the company, and it seems they are looking to somehow pin me to the wall for it!

Thanks for any help!!!

 

Well... the client did not follow the Plan document as far as making the SH Match, because not all participants received the Match (albeit the ones that didn't were HCEs) and the option for a discretionary SH Match to be given to the HCEs was not in place as far as the Plan document was written.  I guess I'm asking what are the consequences to this scenario, and how, if at all, do we solve any issues that may have arisen because of this?

[RTB]

Well... the client did not follow the Plan document as far as making the SH Match, because not all participants received the Match (albeit the ones that didn't were HCEs) and the option for a discretionary SH Match to be given to the HCEs was not in place as far as the Plan document was written.  I guess I'm asking what are the consequences to this scenario, and how, if at all, do we solve any issues that may have arisen because of this?

[K2]

I don't see where there is any other choice but to contribute the missing match and distribute to the HCE's.  There's a similar thread dealing with the SH status, which still exists once you make the contribution.  I guess you lose the deduction as I'm assuming the company is now gone, but if it's not, the contribution should be deductible in 2017.  

 

[Kevin C]

Following the plan document is a qualification requirement.  The qualified status of the plan affects tax deductions, timing of taxation of plan benefits and the availability of rollover treatment for distributions.  That should give them an incentive to fix this. 

 

The SCP correction period for significant failures is in Rev. Proc. 2016-51, 9.02(1).  In general, you have until the end of the second plan year following the year of the failure.  For ADP/ACP failures, the 2 year clock starts at the end of the statutory correction period.  The correction will be to deposit the missed amounts, plus lost income. If the IRS finds out before the correction is done, they will end up in Audit Cap, with a negotiated sanction amount, plus being forced to make the correction.

[BG5150]

Or, roll the audit dice and hope they say:  well, it was the HCE who didn't get it, so it's ok.

(Note:  This is NOT my recommendation.  I am not saying you should ignore the regs.)