Correcting 404 failures

[Guest PatLovett]

I have a 401(k) plan with 4 participants. 3 of the participants defer 15%, and the 4th defers 12%. The plan passes the 415 limits, but fails the 404 limits (since deferrals are not included in comp for 404 purposes). How should I correct this? Should I have deferrals returned to the participant with the most deferrals or the participants with the highest deferral percentage (15%)?

[Guest rhp]

Just because you fail 404 doesn't mean you distribute the deferrals. I think the employer must pay an excise tax on the contributions over the deduction. The deferrals stay in the plan. It's probably advisable to reduce the maximum deferral percentage for 2001 to address this problem.

[Guest PatLovett]

Thanks. I found out that a 5330 has to be filed, and the 404 limit for the next year (2001) will need to be reduced by the excess from 2000.

[Guest]

just in case it might help or apply-

make sure you take

(comp - deferral) and then cap at 170,000.

I have known some people who capped first and then subtracted the deferrals.

[Guest jppcpa]

Tom:

Do you have a cite or example that shows what you described? I've always seen the calculation done as 1700000-deferral. Thanks

[Guest]

man, you like to make life difficult on me trying to find a source that says you calculate it this way.

the best I have is from ERISA Outline Book (2001 edition)

Section XVI Part F

"deductible contributions are subtracted from the gross compensation and then, if the net compensation exceeds the compensation dollar limit, it is reduced accordingly before computing the appropriate deduction limit."

[Guest jppcpa]

Tom: thanks for the info