415 exceeded

[52626]

Employer sponsors a 3% Safe Harbor and and ESOP Plan

Employee deferred the max ( no catch up ) for 2021. When you take into account deferrals, safe harbor and ESOP contribution he exceeded the 415 limit.

The ESOP Document says to refer to EPCRS for correction of 415 excess. The recordkeeper is telling us the excess will be treated as a return of deferrals ( plus income).

Since the only other contribution in the 401(k) account is the Safe Harbor, is the only way to correct the excess is by returning deferrals vs pulling the excess from the Safe Harbor and holding it in an excess account to be used to offset next employer contribution?

 

[Lou S.]

What does your document say?

Typically in these situations the documents calls for a refund of deferrals and earnings to the extent possible to correct the 415 excess. A 1099-R is issued with I believe code E for the refund. This is so that the employee is not limited in what employer contribution they receive.

Though I think some documents may be worded to limit the allocation of employer contributions instead.

[CuseFan]

Agree with Lou. If the SH 401k is a separate plan then that document should say how to handle. If the ESOP and SH create a 415 violation then you have some bigger coordination of multiple plans design issues to resolve.

[EBECatty]

We run into this a fair amount with ESOPs, especially those making large contributions to pay down loans early. The ESOP and 401(k) plan documents may not align on this point, particularly if the two plans are handled by different vendors/document providers. It happens a lot. 

If the two documents don't conflict with one another, follow the coordinated rules. If the two documents conflict, my approach generally is to follow the EPCRS ordering, which reduces unmatched elective deferrals first. As Lou notes, this ensures participants get the full benefit of employer contributions (i.e., they get their own money back).

[jsample]

Your fact set mentions the employee deferred the max, no catch-up.  Is the employee catch-up eligible?