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EPCRS Excess Amounts that are Excess Allocation and application of $250 de minimis rule


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Hello all - 

Wondering if you have an opinion on whether the $250 or less de minimis rule applicable to excess amounts also applies to excess allocations?  As you know, an excess allocation is a subset of an excess amount.

Pg 21/140 of Rev. Proc. 2021-30:

  • Excess amount:  "A Qualification Failure due to a contribution, allocation, or similar credit that is made on behalf of a participant or beneficiary to a plan in excess of the maximum amount permitted to be contributed, allocated, or credited on behalf of the participant or beneficiary under the terms of the plan or that exceeds a limitation on contributions or allocations provided in the Code or regulations.  Excess Amounts include:  (i) an elective deferral or after-tax employee contribution that is in excess of the maximum contribution under the plan; (ii) an elective deferral or after-tax employee contribution made in excess of the limitation under § 415; (iii) an elective deferral in excess of the limitation of § 402(g); (iv) an excess contribution or excess aggregate contribution under § 401(k) or (m); (v) an elective deferral or aftertax employee contribution that is made with respect to compensation in excess of the limitation of § 401(a)(17); and (vi) any other employer contribution that exceeds a limitation under § 401(m) (but only with respect to the forfeiture of nonvested matching contributions that are excess aggregate contributions), 411(a)(3)(G), or 415, or that is made with respect to compensation in excess of the limitation under § 401(a)(17)."
  • Excess allocation:  "The term “Excess Allocation” means an Excess Amount for which the Code or regulations do not provide any corrective mechanism.  Excess Allocations include Excess Amounts as defined in section 5.01(3)(a)(i), (ii), (v), and (vi) (except with respect to § 401(m) or 411(a)(3)(G) violations).  Excess Allocations must be corrected in accordance with section 6.06(2)."

Pg 34/140 of Rev.  Proc. 2021-30:

  • "(e) Small Excess Amounts.  Generally, if the total amount of an Excess Amount with respect to the benefit of a participant or beneficiary is $250 or less, the Plan Sponsor is not required to distribute or forfeit such Excess Amount.  However, if the Excess Amount exceeds a statutory limit, the participant or beneficiary must be notified that the Excess Amount, including any investment gains, is not eligible for favorable tax treatment accorded to distributions from the plan (and, specifically, is not eligible for tax-free rollover).  See section 6.06(1) for such notice requirements. 

There are differing opinions on whether the $250 de minimis rule applies to an excess amount that is also an excess allocation.  An example, employee elects to defer 5%, but the plan sponsor withholds 7% in error. The 2% would be considered an excess allocation.  Could the plan sponsor elect to use the $250 de minimis rule here?  According to the ERISApedia.com webinar presenters, the answer is no. I even challenged this statement during the webinar and the presenter said the $250 de minimis rule doesn't apply.  

I cannot find anything on the web except one article from Newfront that says the de minimis rule doesn't apply to excess allocations.  And, the Rev. Proc. doesn't really make it clear enough to be certain.

Any feedback is greatly appreciated!  Thanks.

It's nice to be important, but it's more important to be nice...

CPFA, CPC, QPA, QKA, ERPA, APA

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If the participant had incorrect deferral amounts withheld, I would suggest the employer make the participant whole on their next paycheck. Paying them the amount that should not have been withheld. And also leave the excess in the participant's account. At that point the excess is an employer contribution (not a deferral), which hopefully would be allowed. If it isn't (because it exceeds something like the 415 limit, or doesn't comply with the plan's contribution formula), well then I would look to EPCRS to see what is allowed, such as the de minimis rule you mention. 

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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