Sponsors of 401(k) plans experience a great deal of Section 415 compliance problems due to the many types of contributions being made at various times during and after the plan year. For example:
• elective deferrals and after-tax contributions are made during the plan year;
• matching contributions can be made during or after the plan year;
• forfeitures are allocated as of the close of the plan year; and
• employer nonelective contributions generally are made after the close of the year.
As noted in a recent Technical Update from Sungard Relius, if a 401(k) plan is in violation of Section 415, a correction method is no longer provided under the IRS regulations. Rather, plans are directed to use the IRS’s correction program, EPCRS, which provides a five-step ordering rule for correcting the plan:
1. Distribute unmatched after-tax contributions
2. Distribute unmatched elective deferrals
3. Distribute matched after-tax contributions
4. Distribute matched elective deferrals
5. Forfeit nonelective contributions
A plan sponsor has the ability to correct a Section 415 violation only if it is honestly trying to comply with the plan document and made an inadvertent error. If the same errors are made repeatedly and likely are results of the administrator not following the document, the plan cannot self-correct.
A 401(k) plan that violates the 415 limit should be able return the deferrals using the ordering rule within a reasonable amount of time without raising IRS concerns, Relius advises. However, after a year or two of violations, the IRS probably would expect the plan sponsor to determine in advance whether participants have sufficient Section 415 room for its nonelective contribution before make the contribution. After the first year or two of violations, the plan sponsor would either need to use the safe harbor correction method if possible, or resolve the violation under the VCP program, according to the Technical Update.
