Excess Amounts under $250

While calculating the annual true-up match, a safe harbor 401(k) plan recently determined that the value of the imputed income for non-cash fringe benefits was incorrectly included in Eligible Compensation when calculating employer matching contributions during 2025. These amounts should have been excluded from compensation according to the plan document. The amount of the employer matching contributions attributable to the error (let's call them "excess matching amounts") for an individual participant ranges from $20 - $80.

My interpretation of IRS ECPRS rules is that these are Excess Amounts under Section 5.01(3)(a) and do not need to be forfeited under Section 6.02(5)(e) if the Excess Amount is under $250 for an individual participant. But we are getting significant pushback from the recordkeeper who is insisting that negative adjustments must be made to participant accounts to remove the excess matching amounts. We have gone back and forth and they keep insisting there is no de minimis correction amount (which I know is accurate for missed contributions, but that's not the situation here). Am I missing something? Is my interpretation incorrect?

• Section 5.01(3)(a) states that an Excess Amount includes “...a contribution, allocation, or similar credit that is made on behalf of a participant or beneficiary to a plan in excess of the maximum amount permitted to be contributed, allocated, or credited on behalf of the participant or beneficiary under the terms of the plan...” 
• Section 6.02(5)(e) says, "Generally, if the total amount of an Excess Amount with respect to the benefit of a participant or beneficiary is $250 or less, the Plan Sponsor is not required to distribute or forfeit such Excess Amount. However, if the Excess Amount exceeds a statutory limit, the participant or beneficiary must be notified that the Excess Amount, including any investment gains, is not eligible for favorable tax treatment accorded to distributions from the plan (and, specifically, is not eligible for tax-free rollover).”

If you agree the excess matching amounts are Excess Amounts that do not need to be forfeited because they are under $250, and the plan sponsor chooses not to forfeit the amounts, is there any impact on the plan's safe harbor status? Does it matter if only HCEs received these amounts? 

TIA for your input!

Almost always, a recordkeeper’s service agreement excludes tax or other legal advice.

Further, there often is a warning that no one may rely on the recordkeeper’s explanation even of mere information about tax or other law.

You’re smart to pursue your own research.

Unfortunately, the vendor is correct and I wish the IRS would clarify this issue because it does cause a great deal of confusion. Your situation is an excess allocation. ECPRS treats excess allocations differently than excess amounts for purposes of the $250 rule. Excess amounts are generally ADP/ACP refunds, excess deferrals, etc...these are amounts that are normally corrected by distribution. The IRS says, okay, if it is normally corrected by distribution and the amount is less than 250, you don't need to distribute.

However, in your situation, you have an improper application of the definition of compensation (that is an operational failure) that is causing an excess allocation. The normal correction is not by distributing this amount to the participant. Rather it is forfeiture or re-allocation to other participants. The $250 rule does not apply in such case.

Don't overlook your last question "Does it matter if only HCEs received these amounts?"  If the HCEs keep the excess match, then they will have had a match rate that is higher than an otherwise similarly situated NHCE.  That matters.

Out of curiosity, who did the true-up calculation?  Typically, it's the recordkeeper who likely is using compensation provided by plan sponsor.  If so, consider reviewing prior years' true-up data and calculations and to see if this has been a recurring issue.