Employees in excluded classification received contributions, and were allowed to defer

[Belgarath]

RP 2021-30, Appendix B, .07(4) provides a correction for early inclusion of an "otherwise eligible" employee. What about an employee (NHCE) in an excluded classification who was mistakenly allowed to defer, and received employer safe harbor nonelective contributions?

Since EPCRS provides certain pre-approved fixes, but those fixes are not the exclusive methods of correction, do you think this fix (retroactive amendment) would be acceptable, to allow this person to participate? Or, must the deferrals plus interest be refunded to the participant, with the employer contributions being forfeited as an excess allocation, and used accordingly?

Other thoughts? Have not ever seen this particular situation that I recall. It seems "reasonable" to me to permit the amendment to remove this person from the excluded classification, but might be risky. Wouldn't even consider if it was a HCE...

Thanks.

[CuseFan]

I expect the plan has language for correcting this that involves the refund/forfeiture method you mentioned. I would think a retroactive amendment that allows for this participation would be OK, but would it be temporary, i.e., only allow what has happened so far but then exclude again prospectively, or allow continued participation? Could allowing this participation to stand, and especially allowing it to continue, create an HR issue for the plan sponsor? Joe and I are both hourly, union, department X, location Y, whatever the exclusion criteria but he was allowed to participate and get employer contribution while I was not - I want mine!

[Paul I]

The employee was not eligible so the deferrals are an Excess Allocation and refundable under EPCRS 6.06(2) using the Reduction of Account Balance Correction Method.

I agree with CuseFan that scenarios where the individual keeps the account can easily morph into an employee relations issue.  Further, is the cost of amending the plan and sending out an SMM to everyone less of a hassle than closing out the account?

Also think of all of the effort to track this special amendment as the plan ages, benefits staff turnover, recordkeepers change, special provisions in plan documents are not carried forward proper during a restatement cycle...  For the sake of future generations, keep the plan clean.