No violation of 415, 402(g) or 401(k) - just 404(c)

[imchipbrown]

I've asked this in "Correcting Plan Defects" but feel free to give this a shot.

My client has a 401(k) plan. For the 2000 year, it was operated as a Safe Harbor Plan. There were 5 employees deferring from 5 to 20%. During the year, all but 2 employees resigned, leaving one employee deferring 15% and the owner 20%. The "cushion" created by employees who didn't defer a full 15% was used up by late October, and now contributions exceed 404©.

The plan addresses several issues that may be corrected. We can create a suspense account if an employee exceeds 415 limits. Didn't happen. We can return excess deferrals. Under the safe harbor, there were no excess deferrals.

The document does say "The contribution for any Plan Year by the Employer shall not exceed the maximum amount deductible...." however, it is silent on what happens if 404© is exceeded.

Even if we "revoked" safe harbor, the excess deferral created would be too small to fix the problem.

What can be done?

[Guest]

its 404(3)(A).

you can only deduct 15% (and it is net comp, though remember take comp - deferral and then cap at 170,000).

If the amount contributed is greater than that, then there is a 10% excise tax, and hopefully next year you can deduct the remainder of the excess.

[rcline46]

Half tongue in cheek reply - Pay the excise tax, reduce deferrals in next year to 'recoup' the overage, and sue the plan designer for malpractice.

No competent designer would put in a Safe Harbor plan with 20% deferrals especially if other contributions were heavy.

[LCARUSI]

Were there any employees who were eligible, but not deferring? If yes, you would include their compensation in the determination of the maximum deductible amount under 404(3)(A).

That would help alleviate the problem.

[imchipbrown]

Thanks, all. This Standardized Prototype has no check-off to limit deferrals to any percentage.

Yes, LCARUSI, there were other employees, but we've used up that cushion.

RCline46, I try to tell the owner not to defer 20%, but he pays the bills.

Sorry, Tom, had a "senior moment" there with the 404© - meant to type 404(a)(3)(A).

My main concern is whether the Plan's terms have been violated, and if so, what can be done without again violating its terms by taking some action not spelled out in the Plan.

If excise tax is the "fix", that would be great.

[rcline46]

I know someone who's opinion is that use of a Standardized Prototype is tantamount to malpractice. Not all SPs are created equal and some that I have seen allow setting of the deferral % limit.

Contributions may be hinged on deductibility, but that is a document issue.

Generally, excise tax is the answer.