404 DC deduction limit "correction"

We have a client with a 401(k)/profit sharing plan with prevailing wage contributions. We just discovered that in 2018, they increased the rate of prevailing wage contributions, causing a large nondeductible contribution amount. We can reduce it a bit by pushing a post-year-end deposit into the 2019 fiscal year deduction. 

Another option to further reduce the nondeductible amount may be to retroactively amend the plan to bring in an excluded class, and employees who had not met initial eligibility, and give them a profit sharing allocation (the plan is not Top Heavy). I know this would require approval under VCP to be sure it's acceptable. If the client were to do that (assuming waiving the VCP submission), what would likely be considered a "meaningful benefit"? Would 1% of compensation work, or should be more conservative and give them 3% (to match what the IRS considers the minimum for Top Heavy)? They will still have a nondeductible amounts, with a 10% penalty and offset to the 2019 404 limit.

Thanks.

I was at Relius's Advanced Pension Conference last year in Chicago, and we had a discussion on -11g amendments to retroactively increase benefits.  The opinion of the presenter was that any new contributions created by the amendment wouldn't be deductible for the prior year. 

The argument was that the tax deduction rules only let you consider the compensation for those covered under the plan as of the actual 12/31 date as it's occurring, and that there's no retroactive fix for that.  Obviously I'm not doing a great job of summarizing it here, but perhaps someone else can speak to it more fully.  Since it would seem to work against you getting the outcome you're hoping for.

Since contributing a nondeductible amount is not a qualification error, I don't think you can get approval for a retroactive amendment in VCP. Is there no flexibility in your plan language regarding amount of nonelective contributions, rate groups, etc.?

13 hours ago, Bri said:

I was at Relius's Advanced Pension Conference last year in Chicago, and we had a discussion on -11g amendments to retroactively increase benefits.  The opinion of the presenter was that any new contributions created by the amendment wouldn't be deductible for the prior year. 

The argument was that the tax deduction rules only let you consider the compensation for those covered under the plan as of the actual 12/31 date as it's occurring, and that there's no retroactive fix for that.  Obviously I'm not doing a great job of summarizing it here, but perhaps someone else can speak to it more fully.  Since it would seem to work against you getting the outcome you're hoping for.

Thanks. I did see discussion about the year-end issue, but it seemed like it may not apply to discretionary contributions which haven't yet been declared. Fortunately, the client took my recommendation to not retroactively amend.

7 hours ago, Luke Bailey said:

Since contributing a nondeductible amount is not a qualification error, I don't think you can get approval for a retroactive amendment in VCP. Is there no flexibility in your plan language regarding amount of nonelective contributions, rate groups, etc.?

The Prevailing Wage contributions were already determined and deposited, so no flexibility there.