Correction required for former participant with no account?

[kmhaab]

Is a corrective contribution required for a former participant who has taken a complete distribution and no longer has an account in the plan?   

Section 6.02(5)(b) of Rev. Proc. 2016-51 states, "Corrective contributions are required to be made with respect to a participant with an account under the plan."  But I cannot find anything specifically addressing individuals without an account.  

 

Thanks in advance!

[justanotheradmin]

I've never heard otherwise. Not having an account should never be a barrier to receiving a required benefit. 

I'm guessing the plan and trust is set up for each participant to have their own individual recordkept account (as opposed to some sort of pooled arrangement). Whether someone has an actual physical account for their money, or if the plan just maintains an account on paper, the contribution should show as being for that participant. 

The participant's consent is not needed to set-up an account. 

I have occasionally seen sponsors deposit the corrective amount into a holding or suspense account for the plan, and then immediately pay it out (subject to the plan's distribution force-out rules). In that case, the participant's account something that is tracked or shown on the year end accounting, but isn't necessarily going to show up on any statements from the financial institution because the money will be labeled "holding account" or whatever. 

what kind of plan is it? 401(k)? 403(b)? what is the asset arrangement? recordkeeping accounts subject to participant direction? brokerage account? pooled investment account? 

[Belgarath]

Might depend upon the nature of the correction. For example, without going into all the detail, under the "one to one" correction for an ADP/ACP failure, it is permissible to make a corrective contribution only to people who are employees on a date during the year of correction that is no later than the date of correction. See Rev. Proc. 2016-51, Appendix B, Section 2, .01(1)(b)(iv)(B)(1).

[Kevin C]

It can also depend on the amount of correction for the terminated participants without balances.  

Quote

Rev. Proc. 2016-51, Section 6.02(5)(b) Delivery of small benefits. If the total corrective distribution due a participant or beneficiary is $75 or less, the Plan Sponsor is not required to make the corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant or beneficiary would exceed the amount of the distribution. This section 6.02(5)(b) does not apply to corrective contributions. Corrective contributions are required to be made with respect to a participant with an account under the plan.

I read the last part as saying you still contribute the full amount of the corrective contribution, but don't allocate it to someone terminated without a balance if this applies.  In effect, what they would have received gets spread among the others receiving the corrective deposit.  At least, that's what we did when we had this situation come up.

[Luke Bailey]

kmhaab, I think the short answer to your question, is generally, "Yes, they need to get a distribution," but without knowing specifically what error is being corrected it's impossible to say for sure. You've cited (Section 6.02) just a general correction principle in 2016-51. If, for example, a bunch of folks didn't get some money in an allocation they were supposed to get, then correction requires they all get it, whether they are still employed by the plan sponsor or not.

[CJ Allen]

In certain instances, where a participant is required to receive a corrective distribution, but has already taken distribution of the account, the distribution made contains the corrective distribution.  In the instance the distribution was rolled over, the participant must be notified of the portion of the distribution that was not eligible for rollover as a corrective distribution.  The 1099-R issued in January of the following year would show any rollover distribution separate from the non-rollover distribution -- even though the entire amount may have been rolled over.  There would be no tax withholding from the plan distribution if rolled over directly, but that's a reporting issue mostly.

[kmhaab]

Thank you for your responses.  The plan is a 403(b) plan and the correction is for missed participant deferrals due to a failure to withhold deferrals from eligible compensation. Essentially mistakes made by a payroll clerk - i.e. failure to withhold deferrals from a final paycheck or bonus. Amounts are small.  I see this as a failure to apply the correct definition of compensation under the plan. Does this change any prior advice?

[Luke Bailey]

Does not change my answer. This is a classic correction situation. You can't leave some out just because they termed. If the amounts for some are de minimis, you might get IRS to agree to a cutoff amount in VCP. If you are in self-correction, you probably want to be conservative.

[kmhaab]

Thank you!