Excess 415 Issue -- Correction

We have a 401(k) and and ESOP.  We recently had a 415 violation (one participant) that we are trying to correct.

The ESOP provides that, in the event of a 415 violation, allocations under the ESOP should be reduced as necessary to not exceed the limitation.

The question is, do we have to correct that way?  We would prefer to give the one participant his full allocation under the ESOP and instead correct the 415 violation by kicking out elective deferrals under the 401(k) Plan.  We realize this isn't in line with the plan document, but is this something we can correct by amendment (i.e. amending the plans so that a 415 violation is corrected by kicking out elective deferrals under the 401(k) rather than reallocating allocations under the ESOP)?  Or do we even have to amend -- can we just kick money out of the 401(k) and say that there is no issue anymore that needs to be corrected pursuant to the ESOP language?

Thanks you.

Please note, the failure is for the 2021 Plan Year.

Does each plan allocate its amounts as of December 31?  Maybe there's a technicality that the 401(k) amount didn't come first, and you could look at how that plan's document says to fix the issue (perhaps invoking EPCRS and a deferral refund).

2 hours ago, Bri said:

Does each plan allocate its amounts as of December 31?  Maybe there's a technicality that the 401(k) amount didn't come first, and you could look at how that plan's document says to fix the issue (perhaps invoking EPCRS and a deferral refund).

 

That's a good idea.  I don't have the full plans, but I'll get them.  Assuming that isn't an option, would a retroactive amendment work?  Could we just follow the EPCRS guidance and say that trumps the Plans' terms (EPCRS says to kick out elective deferrals first).

I'd be wary of failing to follow the plan's terms.  And as this would be a discretionary amendment, I don't think you could do it retroactively either.

Would it be "plausible to deny" you knew of the 401(k) amount when you allocated the full ESOP amount?  At least then the horse has left the barn and you could potentially address the correction after you missed the 415 check?

(Spitballin' for ideas....)

6 hours ago, HCE said:

The ESOP provides that, in the event of a 415 violation, allocations under the ESOP should be reduced as necessary to not exceed the limitation.

What does the 401(k) plan say? It may say you reduce the 401(k) balance, leaving you to have to make up an administrative rule. Plans used to contain elaborate provisions that described which plans would reduce first in a multiple plan situation, but due to changes in EPCRS that allow you to correct operationally like any other plan error those have gone out of fashion.

And get the amendment done going forward.  I think you are mostly stuck.  This is a problem that tends to happen because ESOPs tend to be written by one attorney and the 4k by another.  They don't always play well together.   I would recommend going forward when you get a new ESOP client to see if you can get this figured out as part of the conversion process to get things sync.  It makes you look good to the new client for one thing. 

Also make sure you did all you can do to minimize the 415 failure.  Things like if the ESOP is leveraged and the plan allows did you use the lower of the loan payment or the FMV of the shares released?