Prior plan contributions made to PEP

I have a client that completed their 2022 audit and discovered employees who are due an additional Safe Harbor contribution.  The advisor is asking if these can be made to the PEP.

My initial response is they should be made to the original plan and then a second wire/transfer can be sent to the PEP.  The prior recordkeeper is unwilling to accept the Safe Harbor contributions as they have completed the termination.

I thought maybe the Safe Harbor contributions can be submitted to the PEP and then have the recordkeeper reclassify these amounts as transfer funds.  I know this won't be the last time a situation like this occurs with a PEP.

Any thoughts ?  

The situation seems to have some blanks that need to be filled in.  Is this the scenario?

• A company had a standalone 401(k) plan and decided to move the plan to a PEP. 
• The 401(k) merges into the PEP, assets were transferred out of the 401(k) plan and transferred into the PEP. 
• Contribution sources continue to be accounted for separately in the PEP (pretax to pretax, Roth to Roth, NEC to NEC, match to match, rollover to rollover,...)
• All protected benefits in the 401(k) plan continue to be available in the PEP.
• The 401(k) plan filed final 5500 showing assets going to zero as a result of the transfer.
• The auditor discovered that additional Safe Harbor contributions were due to some employees.

If this is pretty much the complete picture, then the company should fund the amounts due to the PEP and have them deposited into the Safe Harbor source.

If the scenario differs, there could be some major compliance issues.  Some examples: 

• If the 401(k) was terminated, and the PEP was set up within 12 months, then there is a violation of the successor plan rule. 
• If active employees were allowed to take distributions (not otherwise available as in-service withdrawals), then there were distributions made without a distributable event.
• If the PEP treats all of the assets transferred as rollovers, there is a problem that the character of and provisions related to the different contribution sources were removed (e.g., restrictions on the availability of elective deferrals for in-service withdrawals before age 59 1/2). 
• If the PEP did not preserve protected benefits, then there is a violation of anti-cutback rules.

Ask questions, get the complete picture, confirm that the transition from the 401(k) to the PEP was a merger, confirm that the final reporting and compliance for the 401(k) was completed timely, and if everything checks out, then addressing where to fund the missed Safe Harbor contributions is a trivial task.

Thanks Paul I for your response.  Your 6 assumptions to this scenario are correct.

To clarify my question, the Safe Harbor contributions that are funded to the PEP, should be reclassified as transfer funds under the Safe Harbor money type, correct ?  I don't believe they can/should be a contribution ???

The correction process in EPCRS 6.02(4)(b) would have the missed amounts deposited as contributions into the plan as Safe Harbor contributions along with missed earnings on those contributions.  The contributions would be considered an annual addition for 2022 purposes of applying the 415 limitations for that year.  The contributions will be deductible on the employer's 2023 tax return.

I'm not sure if any correction method, i.e. correcting compliance errors that occured in a now terminated stand-alone plan and being corrected in a PEP as a new adopting employer, are discussed anywhere in the regulations.

I would love to have a new PEP / MEP message board, to have PEP / MEP issues all in one place.

That is a good idea.  You can start a new board on BL.  On the Forums (Message Boards) page, click on the Start new topic and name it.

PEPs are odd ducklings because the Plan Sponsor is a Pooled Plan Provider versus a business, and companies join the PEP by adopting a participation agreement.  The fiduciary responsibilities that in a single employer plan all belong to the business are divided between the PPP and the participating companies.  Right now, there are less than 200 PPPs and the number of PEPs is below 350.

The industry is in limbo with respect to many topics and the regulating agencies have projected time frames to release of regulations that extends out 2 or more years from now.  There are instances where a plan cannot wait, and the path forward is guided by precedence and by principles embodied in existing regulations.  Taken together, they provide a foundation for taking good-faith action.  When these good-faith actions demonstrably are favorable to participants, they very, very rarely (if ever) are found to be egregious or unacceptable.

In this particular thread, the topic distilled down to how to account for a corrective action to give some participants a contribution that should have received but did not.  Participants who did receive the contributions they were entitled to get had those contributions put into the plan and then transferred into the PEP.  The suggested treatment is to put the participants who did receive their contributions in the same position as those who did.