Excess Annual Additions
Rev. 05/24/07, E-mail Alert 2007-7

The final 415 regulations address the correction of excess annual additions.

Excess annual addition correction in final regulations
The recently issued tax code section 415 final regulations eliminated the correction methods available in the prior version of the regulations, the 1981 regulations. However, the new 2007 regulations explain that the excess annual addition correction methods we have used since the release of the 1981 regulations remain available under the Employee Plans Compliance Resolution System (EPCRS; Rev. Proc. 2006-27). Those correction methods include:

1. Distributing of the excess annual addition
   
2. Holding the excess in a suspense account for the affected participant(s)
   
3. Reducing future employer contributions for the affected participant. This method allows the excess to remain in the participant's account, unless the participant severs employment before the excess is corrected
   
4. Reallocating the excess to all other plan participants (who do not have 415 problems).

To self-correct under EPCRS, the excess must result from an operational error and there must be administrative practices and procedures in place to correct a failure. For example, if we have a program to run the annual additions test each year and if 415 is exceeded, we distribute the excess annual addition.

These correction methods are also available under Voluntary Compliance Program (VCP) submissions and audit closing (CAP) programs of EPCRS.

Note: That if using the self -correction program under EPCRS, then must operate as if there was significant operational failure and complete the correction by the close of the second plan year after the failure.

Note also, that the IRS has, in EPCRS section 2.02(2), requested comments on whether the 1981 correction methods should be retained as options in EPCRS.