Plan uses a pro-rata allocation and has three participants. The total eligible plan compensation for the three participants was $496,580. The 404 limit for the year is 25% of that ($124,145). The employer deposited $124,140 to the plan which is just under the limit. Two of the employees are HCEs.

EE#	Comp	PS Cont	PS Percent
EE1	$200,728	$53,000	26.404% -- capped at 415 limit for 2016
EE2	$228,800	$53,000	23.164% -- capped at 415 limit for 2016
EE3	$67,052	$18,140	27.054% -- got a higher% because other two capped

Total: $496,580 in comp; $124,140; as profit sharing contribution. Limit is $124,145 (25% of $496,580).

First the auditor tells me no one could get more than 25%. Then IRS auditor is arguing that because it is a pro-rata formula all three have to get the same percent -- especially EE3 who got the extra amount to allocate the full deductible contribution.

It is my understanding that the contribution formula which in this plan is discretionary defines the contribution amount -- which in this plan they wanted to take the full 25% deduction. Then you have to follow the allocation formula which is pro-rata so you have to allocate pro-rata but only up to the 415 limit and they any extra contribution could go to the participant who has not hit their 415 limit.

So in essence they allocated a 27.054% contribution to employees but the plan had to limit the two HCE's to the $53,000 415 max. Is this incorrect?

[Advert.]

Find prospects and covert them to clients with our Plan Data Intelligence/Operational Benchmarking tools. Customize with your logo/color themes. Contact us 612-605-2266, sales@ERISApedia.com

An error was made in a plan document, which resulted in the omission of a year of service requirement for matching contributions. Client is asking to submit VCP filing asking IRS to approve a retroactive amendment, or to approve the calculations for making up the missed contributions. Can you submit alternative correction methods in one VCP filing for the same error? Essentially, "if not this, then that"? Thanks.

I thought the whole idea of inherited IRAs for non-spousal beneficiaries was the participant's beneficiary could roll the money over, e.g., from a 401(k) plan, to an inherited IRA. Then, instead of being forced to receive the distribution from the plan under the plan's terms, the beneficiary could stretch out the payments under the Inherited IRA under the more friendly provisions allowed under the RMD rules, as opposed to the plan's rules. For example, if the plan requires an immediate lump sum distribution on the participant's death, the non-spousal beneficiary could roll the money to an inherited IRA and take the money over the life expectancy of the beneficiary. Now that I re-read Notice 2007-7, Q&A-19, it seems the inherited IRA is required to follow the RMD rules that were in the plan from which the distribution was made. Is that correct? Thus, for example, if the plan requires the distribution to be made under the five-year rule, and doesn't allow for payments over the beneficiary's life expectancy, the inherited IRA must follow the 5-year rule. Is that correct? I am dealing with a Roth 401(k), but I don't think there is a difference between a pre-tax 401(k) or Roth for this purpose. The Roth 401(k) is subject to the RMDs and a Roth IRA is subject to RMDs at the participant's death.