Profit Sharing Calculation and Compensation

Plan compensation is W-2 plus deferrals and excludes fringe.

The Employer decided to do a profit sharing for 2016 and calculated the profit sharing on the gross compensation.  Out of 300 employees, only maybe 60 "could" be affected as they had some other pretax items come from their pay.  I would say most of the employees still received the correct profit sharing because the w-2 pay plus deferrals was the gross compensation.  If anything the 60 get a little more than they should have.(Got* not get.) edited

Auditor is bringing this scenario up as a topic of interest.

The employer is looking to me to help ease the audit question.

I don't find this to be that objectionable.  Should I?

Let me know your thoughts on this.

Failure to follow the terms of the plan is only a problem if they want the plan to be qualified. Have you looked at 1.401(a)(4)-11(g) to see if your situation would meet the requirements to do a retroactive corrective amendment to have the plan terms match what was done for 2016?  

If it doesn't, the EPCRS pre-approved corrections are to either 1) increase allocations to those who didn't get a little more to the same level as the one who got the most "a little more than they should have", or 2) reallocate the PS contribution correctly under the plan terms. 

if the PS total was a specific dollar amount, say $100,000, then not only did some people get too much (because fringe was not excluded from pay), but others were shortchanged because it was a zero-sum error. If you have HCEs predominantly in the windfall group (the ones most likely with fringe benefits) but not the shortchanged group then the error was also discriminatory, which probably takes 11-g away. Agree with KC in terms of either 1) re-allocating the contribution amount correctly or 2) contributing additional amounts to the shortchanged group to make them equal. However, that could be problematic because when you look at the percentage of plan comp (fringe excluded), it could be different for many of the participants - so to what percentage do you equalize?

The PS was 2% per employee, not specific amount/total, so I'm good there.

From my conversation with the employer, fringe was excluded from compensation.  Which is good because plan document has it excluded too.

As I hash this over and over in my mind.  I think the employer calculated the contribution correctly.  The auditor is thinking that the PS was calculated with a different compensation than deferrals.  I don't think that is the case.

I appreciate your comments.

You now seem to think there was no problem to begin with, but in case that does not work out, here's a suggestion. You have not provided all the facts, so what I suggest may or may not work. However, assuming that (1) the profit sharing percentage is not hard-wired into the plan, but is decided from year to year by employer, (2) was not decided or communicated until after the end of the year, (3) the plan document permits rate groups, and (4) the allocation would pass 401(a)(4), with or without cross-testing, just say that in fact the allocation you've got is what the employer wanted and call it a day.

If the plan provides all comp including Section 125 deferrals, why would you net them out of the compensation??