excess match for one NHCE

Traditional 401(k) - not safe harbor - plan sponsor had small system glitch in last half of 2018 and one NHCE received $86 more match that he should have.  It was discovered during the audit.  HCEs received refunds of excess deferrals for failed ADP.  Plan sponsor would prefer not to ask for the $86 back from NHCE.  Is that an option for them or does that cause other problems?

We deal mostly with SH 401(k) plans so we are a little cold on how to address this.

Thanks!

Can't they just have it forfeited from the participant's match source?

Does the match allocation formula require all participants to receive the same match rate? If so, it has to be withdrawn, or everyone else has to receive additional match to compensate.

I don't think he ADP failure figures into this.

The correction is in EPCRS.

The money gets removed (not forfeited) from the account and placed in a suspense account.  The funds in the expense account are to be used to offset future employer contributions.  In fact, no ER contributions are allowed to be contributed until those funds are exhausted.  The amount removed from the account should be adjusted for earnings.

Thank you very much to all who responded!!

4 hours ago, M Norton said:

Traditional 401(k) - not safe harbor - plan sponsor had small system glitch in last half of 2018 and one NHCE received $86 more match that he should have.  It was discovered during the audit.  HCEs received refunds of excess deferrals for failed ADP.  Plan sponsor would prefer not to ask for the $86 back from NHCE.  Is that an option for them or does that cause other problems?

We deal mostly with SH 401(k) plans so we are a little cold on how to address this.

Thanks!

I don't know why everyone is making this so complicated.  Do an -11g amendment and treat it as an additional profit sharing contribution to the NHCE and you are fine.  Just get on it quickly!

M Norton, I think either BG5150's or Larry Starr's proposed fixes will work. You will need to be the judge of which is simpler.

M Norton, after discussing Larry's suggestion above with another practitioner, I am reminded that there may be a difference of opinion regarding whether 11(g) amendments (i.e., amendments under 1.401(a)(4)-11(g) of the regulations that are effective for a prior year outside the rules of 401(b)) can be used to correct something other than a 401(a)(4) or 410(b) failure, which the erroneous match was not. My recollection is that that issue has previously been litigated in these message boards without any definitive resolution. But assuming for sake of argument that one does not think 11(g) amendments can be used except to correct 401(a)(4) or 410(b) failures, I have some additional suggestions for you. First, as I think may have already been state above, if you have a plan with very loose contribution allocation language, you may be able to treat the excess match as a nonelective allocation for the prior year without any amendment at all. Second, if your plan language prevents such an interpretation for the prior year, and if you are conservative regarding the application of 11(g), I have another suggestion. Scrape the money back from the account for the prior year (i.e., the most straightforward "conform the operations of the plan to its written terms" EPCRS self-correction, already suggested above), and then amend the plan to allocate the dollar amount that you scraped away (together with earnings) to the same individual for the current year. As an allocation for the current year, the amendment, if done by 12/31/2019, would be timely as a discretionary amendment, and the 11(g) amendment timing rule would not be required. This latter approach should work perfectly for anyone who is still a participant in the current year. For those who have left during the correction year and already taken a distribution, it's arguable whether this approach will correct the error. And for anyone who left before the beginning of the current year, it won't work at all because they will have not 415(c) comp.

2 hours ago, Luke Bailey said:

M Norton, after discussing Larry's suggestion above with another practitioner, I am reminded that there may be a difference of opinion regarding whether 11(g) amendments (i.e., amendments under 1.401(a)(4)-11(g) of the regulations that are effective for a prior year outside the rules of 401(b)) can be used to correct something other than a 401(a)(4) or 410(b) failure, which the erroneous match was not. My recollection is that that issue has previously been litigated in these message boards without any definitive resolution. But assuming for sake of argument that one does not think 11(g) amendments can be used except to correct 401(a)(4) or 410(b) failures, I have some additional suggestions for you. First, as I think may have already been state above, if you have a plan with very loose contribution allocation language, you may be able to treat the excess match as a nonelective allocation for the prior year without any amendment at all. Second, if your plan language prevents such an interpretation for the prior year, and if you are conservative regarding the application of 11(g), I have another suggestion. Scrape the money back from the account for the prior year (i.e., the most straightforward "conform the operations of the plan to its written terms" EPCRS self-correction, already suggested above), and then amend the plan to allocate the dollar amount that you scraped away (together with earnings) to the same individual for the current year. As an allocation for the current year, the amendment, if done by 12/31/2019, would be timely as a discretionary amendment, and the 11(g) amendment timing rule would not be required.

My believe is that it is about a 90%/10% split on the issue Luke mentions (I am in the 90%), and of course I believe that the 90% are correct! ? Also, I know that from my days chairing the IRS Q&A sessions with IRS, that our major IRS folks from those days were also in agreement with the 90%.  Part of the reason is that there is no way of knowing for sure that you actually failed 401(a)(4) or 410(b) since there are almost an infinite number of ways that you can try to pass, particularly (a)(4).

I am convinced that an -11g amendment is perfectly proper to accomplish what you want, but your mileage may differ.

7 minutes ago, Larry Starr said:

My believe is that it is about a 90%/10% split on the issue Luke mentions (I am in the 90%), and of course I believe that the 90% are correct! ? Also, I know that from my days chairing the IRS Q&A sessions with IRS, that our major IRS folks from those days were also in agreement with the 90%.  Part of the reason is that there is no way of knowing for sure that you actually failed 401(a)(4) or 410(b) since there are almost an infinite number of ways that you can try to pass, particularly (a)(4).

I am convinced that an -11g amendment is perfectly proper to accomplish what you want, but your mileage may differ.

Larry, just for completeness, you have no objection to the workaround I offered, right? And it would work for folks who go past October 15. The -11g method might be required if participant has terminated, however, unless you want to apply the scrape back and current amendment approach spiritually.

15 minutes ago, Luke Bailey said:

Larry, just for completeness, you have no objection to the workaround I offered, right? And it would work for folks who go past October 15. The -11g method might be required if participant has terminated, however, unless you want to apply the scrape back and current amendment approach spiritually.

Luke, yes, I would agree with you workaround. Of course, I would avoid it! ?

Larry, I think they're about equal in terms of trouble. Easiest is just to take the money away from the participant and reallocate.

18 hours ago, Luke Bailey said:

Larry, I think they're about equal in terms of trouble. Easiest is just to take the money away from the participant and reallocate.

Not in my shop; the -11g amendment can be crafted by me in less than 2 minutes; sent via email to the client to sign and return. Should take about 5 minutes total. No having to mess with allocations among the participants, just properly identifying the extra money for that individual as employer PS allocation. FWIW.