Can EPCRS be used for a late Profit Sharing Contribution?

I know a profit-sharing contribution is discretionary and is not required to be funded.

Have a client with a 401(k) Profit Sharing Plan where they forgot to fund the profit-sharing contribution for the plan year ended 12/31/2022.

They have funded a 10% of salary profit sharing contribution for the past 20 years every year and would like to make up the missed contribution now. Is there anything under voluntary correction or self-correction that would allow the contribution to be funded now but allocated based on 2022 data? The problem with just funding double the normal contribution now is that there were about 10 participants who terminated employment in 2022 and were entitled to a profit-sharing contribution then. They would not receive any contribution now if it had to be based on 2023-year salary.

Thanks.

Same situation you posed Tuesday but now asking if EPCRS might be a fix?

Maybe, but that's now without its issues. This is likely not the typical self-correction fix and move on scenario, which means a VCP filing to request the proposed solution. Given that there is clear documentation (deduction) that they intended to contribute, IRS may be sympathetic to allowing a 2022 allocation, especially since the main reason for doing so is providing profit sharing to people who have left the company (very noble - don't see that much). However, if the allocation formula is cross-tested and would allow HCE(s) to max 2022 by this "fix" I think that is a MUCH tougher sell. Regardless, VCP filing response times work against you, especially for a non-routine/special issue, so you may not know until late this year (best case) or sometime next year for approval. I don't think IRS would waive any deduction timing or limits, so you might be doing a 2022 PS allocation in 2025. I don't know the ramifications for doing what you want now and then filing to get IRS to bless after the fact.

Depending on the formula, you may be able to get all the actives in 2023 what they would have received for 2022 and 2023, just not the 2022 terminations. If the problem is owner(s)/HCE(s) not maxing out 2022, I think they just need to "grin and bear it" and they'll never forget another profit sharing contribution.

EPCRS is used to correct plan qualification failures. Typically those are operational failures, which means a failure to follow the plan document.

Most profit sharing plans these days will say that the contribution is totally discretionary, but not all. Does your plan document actually say that the contribution is discretionary? If the 10% contribution is required under the terms of the plan, then not making it would have been an operational failure that could be corrected (probably self-corrected) under EPCRS.

Failing that, did the employer make a corporate resolution, or notify the plan administrator, or otherwise memorialize their intention to make the 10% contribution for 2022? If so you may have something to lean on to call it an operational failure.

On 4/25/2024 at 12:46 PM, C. B. Zeller said:

did the employer make a corporate resolution, or notify the plan administrator, or otherwise memorialize their intention to make the 10% contribution for 2022?

I think they claimed a deduction for 2022, which needs to be amended on that tax return, which certainly evidences intent. But yeah, that would certainly be a Hail Mary pass and you wouldn't know if it was completed until the game, maybe even the season, was over.