415 excess 415 Excess - Past Deadline - True Ups also due...

[401kology]

Assisting a sponsor that discovered that the 415 limits were tested before the final true up. The participants are due additional safe harbor match, that will cause more excess that needs to be distributed. Participants that are affected should have had after-tax refunded but have since rolled over account balances to new employers plans.

Would depositing the true up and processing the excess from the additional allocation be permitted since that is all that remains in the plan?

The only other solution is to issue the letter that they have to take the excess out of the current plan and then let them know they have additional that can be rolled over, which does not sound correct. Anyone run into this situation?

The 415 excess must be corrected, but the regs only address the order not necessarily what to do if the other sources have been distributed.

[Lou S.]

Read the Plan document to see if has ordering rules. Though if they already took all their money out and this will satisfy the refund I don't see why you couldn't use it? But I'd probably document as "administrative procedures" in case this comes up again you can do do the same documented fix.

[Artie M]

I would also look at the plan's terms regarding allocation of amounts.   Many/most plans will have a provision that says you cannot allocate an amount in excess of the 415 limit (e.g., "If the Annual Additions the Plan Administrator otherwise would allocate under the Plan to a Participant's Account for the Limitation Year would exceed the Annual Additions Limit, the Plan Administrator will not allocate the Excess Amount, but instead....") Under your facts, the Plan knows that the allocation of the true-up will create a 415 bust so it shouldn't contribute the amount to the account (at least under the exemplary provision). 

Also, I am not sure how you are going to correct this by allocating more excess amounts... if had $70,000 in 2024 and should have distributed $1,000, the Plan is going to contribute an additional amount to the participant, let's say a $1,250 true up, so now the participant had $71,250 in 2024, so you distribute the $1,250 in the account but still have the original $1,000 excess that can't be fixed.  Seems like you are in the same position.  What am I missing (many of my friends say that I can be quite obtuse)?

[401kology]

Thank you both, the issue here is that the match owed is a safe harbor match with required annual true-up, so it must be funded and the return is typically the un-matched after-tax first. The issue is that the participants have taken distributions, so there is no AT to return. I can't wrap my head around not funding the safe harbor match that is required, even though the participants have already exceeded the 415 limits. That was where it seemed reasonable to allocate the true-up but then have that refunded to the ppt as a 415 excess refund.

And yes - that is the exact terms in the plan document the correction of which is pursuant to EPCRS.

[Lou S.]

I would fund the SHM, I don't see how you don't.

I'm not sure if this correct solution but I would not have a problem refunding 100% this as an excess annual addition.

Now if you are still over the 415 limit and there is no money left, looks the instructions to Form 1099-R under "Refund After Total Distribution", depending on when the withdrawal occurred you may have to do amended 1099-Rs and you will need to notify the participant that some will need to be withdrawn as an excess IRA contribution.

[Artie M]

So, if the plan says you must contribute the match, then you must contribute the match.  I was just saying look to the terms of the plan but make sure to look at all of the terms of the plan.    Once that is contributed, again, you still have an excess amount that must be distributed.  Since it is a safe harbor match, it seems it should be distributed to the affected participants because it was a match to which they were entitled and it they're 100% vested.  This distribution would require a 1099 indicating taxable and not eligible for rollover.  I didn't see in the 1099 instruction a heading for Refund After Total Distribution (nor did I see the phrase after a search) but I agree that a corrected 1099-R likely should be filed for the prior distribution since it contained incorrect information (i.e., a portion of the distribution actually should be taxable and actually is not eligible for rollover treatment). 

Not sure if your client actually issues the 1099s for the Plan or if it is issued by a third-party plan administrator/recordkeeper.  Recently we encountered the issue of needing a corrected 1099-R to be issued by a TPA but the TPA refused to issue the corrected 1099 stating that the form was correct when originally issued.  The client sent a letter to the affected participants with the required statements, and a suggested to consult their personal tax advisors.   Without the corrected 1099R though, not sure if affected participants will do anything because the IRS won't know about the issue unless my client is audited.

As an aside--though It was not included in the letter, the client's TPA was informed that if an affected participant contacts the client requesting a corrected 1099R they will be informed that the client requested that a corrected Form 1099R be issued but the TPA stated it was not required, and the affected participant will be directed to the IRS website Topic no. 154, Form W-2 and Form 1099-R (what to do if incorrect or not received) | Internal Revenue Service (which informs the taxpayer to contact the IRS and it will request the employer/payer to issue a corrected form).  In the event the IRS contacts the client, all communications with the TPA were uploaded to a file so the client can give it to the IRS to show that it attempted to get the corrected 1099R but the "payer" stated it was not required.

[Lou S.]

https://www.irs.gov/pub/irs-pdf/i1099r.pdf

 

Look at the "Failed ADP Test After Total Distribution" on page 8 of the instructions. I would follow a similar approach for the failed 415 test in this situation mirroring IRS instructions. Though I think that would only apply if part of the prior distribution is recharaterized as not eligible for rollover. I think if the prior rollover did not include any amounts that were over the 415 limit and the excess is ONLY due to the additional safe harbor match, they I could do 100% of the 415 refund out of the new safe harbor match deposits. Those would be refunded to the participant as taxable, not eligible for rollover and with I believe Code E on Form 1099-R. It seems the cleanest and easiest. Though again I'm not sure if that is 100% technically correct, especially if conflicts with the Plan's operational ordering rules on which funds to refund first to satisfy 415.

[401kology]

Thank you both. I am in 100% agreement that the safe harbor match must be funded as that is due to the participant and is 100% vested.  We are seeing this occur more frequently with the interest in After-Tax contributions. I would always advise that the employer have policies and procedures in place to cap the AT at a dollar limit that would preclude the plan from failing any 415 limits, but as you both know we always find out after the fact.

@lou thanks for including the 1099-R reference, as I do believe in some situations that corrected 1099-Rs must be issued and then the issue working with a bundled provider is if they will issue the corrected forms. I am actually speaking at the ASPPA Spring National and have suggested this topic for the ask the experts session.

Obviously if the participant still exceeds the limit, then letters are issued with instructions to the new custodian to distribute amounts that were not eligible for rollover and/or issue corrected 1099-Rs for the amount of the AT that was rolled to new plan and not eligible for rollover.

[401kology]

From an attorney friend: if the 415 limit applies you don’t allocate anything over the 415 limit, even if it would otherwise be required. If you do an allocation in excess of 415, then using self-correction is questionable. No telling if the IRS would be sympathetic when applying SECURE 2.0 because they could argue that you don’t have ‘adequate’ practices and procedures in place. While I’d by sympathetic and allow the participant to receive the full employer contributions, the current EPCRS procedure only has an exception to practices and procedures if it relates to deferrals and nonelective contributions.

So it seems that (assuming that is how the plan document reads) that not exceeding the 415 limit trumps the requirement to fund the safe harbor match. 

[Lou S.]

I would disagree as failure to allocate the SF match is a failure to follow the terms of the Plan document is both plan qualification issue and calls into question whether you even satisfy the safe harbor rules for the year. While correction of 415 excess is address in the EPCRS procedures.

[Artie M]

While I don't disagree with what is being said, I do believe that the terms of the plan need to be clarified for future purposes.  As noted in my original post, I have an issue with what is occurring because the Plan is knowingly violating 415 (old school... thou shalt not violate 415).  Also, though the solution that is being offered up... fix via EPCRS... can be used to fix a 415 violation, I am uncomfortable with its use on an annual basis (it is implied that it will keep occurring).  To self-correct under EPCRS there must be "established practices and procedures "in place to keep this from re-occurring.  The Rev. Proc. states in relevant part:

(2)  Established practices and procedures. To be eligible for SCP, the Plan Sponsor or administrator of a plan must have established practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance in form and operation with applicable Code requirements. …. In order for a Plan Sponsor or administrator to use SCP, these established procedures must have been in place and routinely followed, and an Operational Failure or Plan Document Failure must have occurred through an oversight or mistake in applying them. SCP also may be used in situations in which the Operational Failure or Plan Document Failure occurred because the procedures that were in place, while reasonable, were not sufficient to prevent the occurrence of the failure. A plan that provides for elective deferrals and nonelective employer contributions that are not matching contributions is not treated as failing to have established practices and procedures to prevent the occurrence of a § 415(c) violation in the case of a plan under which excess annual additions under § 415(c) are regularly corrected by return of elective deferrals to the affected employee within 9½ months after the end of the plan’s limitation year. The correction, however, should not violate another applicable Code requirement….

This language appears to "exempt" repeated 415(c) failures under certain plans from this requirement but plans with matching contributions appears to be explicitly carved out of this "exemption."