ER deposited 'elective' profit sharing

So, unbeknownst to me, the ER wanted to give everyone $1,000 in their 401(k) plan.  However, if they didn't have an account, it was paid as a bonus.  If they had an account, but chose otherwise, it was paid as a bonus.

I know this is a no-no.  The contributions will be considered deferrals for 402(g) purposes.  (I think it pushed one person over the threshold)

But what other correction needs to be done?  Could they give all the missing people the $1,000 and just call it a PS?  (I'm not sure if they filed their 2021 taxes yet.)

I've heard of situations like these, but never encountered one first hand.

I might suggest it being deemed a QNEC to avoid putting any sort of vesting schedule on it.  But yeah, your conforming amendment is going to need data on who actually got the CODA option versus who was just given the 1,000 unilaterally as a plan contribution versus those who got it unilaterally as a bonus.

Someone mentioned just calling it bonus pay, under which some people decided to defer the entire thing and others to not do that.

Is it cross tested with everyone in their own rate group? And have a resolution that the allocation is $1,000 for (list folks who got $1,000) and $0 for (list folks who got $0)? And does that pass testing?

But yes treating it as an elective deferral might be best and most correct option but that may open a whole payroll can or worms with timing, taxes, reporting and W-2s as well as potential 402(g) issues that are now after 4/15 if this was done in 2021.

Allocation is new comp, but it won't pass testing.  

4 hours ago, BG5150 said:

if they didn't have an account,

I'm trying to understand the scenario.... didn't have an account...meaning the employee was eligible and didn't have a plan account open?  Or the employee wasn't eligible and didn't have an "account"?

Sorry for the confusion....

I think the plan was probably deferral and match only and there were a number of eligible employees who did not elect to make 401(k) contributions and did not have any balance in the plan. At least that's how I read the OPs post but maybe I'm wrong.

I don’t like speculation about information not provided. If those without an account are those who are eligible but simply never chose to defer, a correction based on treating the $1000 as bonus, with the bonus eligible for a deferral election (which sounds pretty much like what happened, except perhaps without procedural integrity — was it an all or nothing election?) is complicated by what appears to be the failure to offer the deferral to the “no account” participants. The approach to  correction is complicated by the omission and needs to take into account, at least as a matter of principle rather following a recipe, the IRS guidance concerning failure to provide an election opportunity.

Actual plan terms also must be considered.

On 6/10/2022 at 5:18 PM, Lou S. said:

I think the plan was probably deferral and match only and there were a number of eligible employees who did not elect to make 401(k) contributions and did not have any balance in the plan. At least that's how I read the OPs post but maybe I'm wrong.

It's this.

On 6/13/2022 at 9:21 AM, BG5150 said:

It's this.

So the Plan has only ever been deferral and match?  Seems odd that the ER would suddenly give a PS allocation...  Maybe he "meant" to give a $1000 bonus to everyone and "mistakenly" payroll processed it as deferral and put it in the Plan???  The ER might not like the extra FICA tax, but probably a lot simpler to back it out of the Plan and reprocess those amounts as 2022 bonus payroll, same as the other non-account holders recieved.  No amendment, corrective action, 402g issues, amended w2 or tax filings...

Side note.  I ran it thru nondiscrim and it works as a PS!  Only 1/5 HCE got it.  coverage over 100%.  Gateway passed and then a(4)

On 6/21/2022 at 10:38 AM, BG5150 said:

Side note.  I ran it thru nondiscrim and it works as a PS!  Only 1/5 HCE got it.  coverage over 100%.  Gateway passed and then a(4)

If flat dollar allocations pass ratio coverage, and you aren't using components, then no further testing; gateway is ignored and a(4) mirrors the ratio.

As long as your document provides for individual allocation groups then you would just need the deposit for the rest of the eligible nonHCE's.  The fact that an HCE got an early deposit is likely offset by recent market losses for BRF purposes.