Among those reportedly being paid out are former players Reni Maitua, Matt Keating and Cheyse Blair.
Smith said Parramatta had been given multiple warnings that it was in danger of breaching the caps but did not take sufficient steps to address the non-compliance. He said that the NRL generally imposed a fine commensurate with the level of the breach.
The penalty is the second biggest fine the NRL has handed out since its inception in 1998, however Smith was adamant the Eels hadn't rorted the system.
"This is the fourth out of five years that we've seen salary cap breaches in that club," Smith said.
"I don't think this is about cheating. This is about mismanagement.
"A lot of the things across the game that we've tried to do is prevent these things happening in the future because they invariably take a number of years to fester and bubble."
But the club would be fined an additional penalty, taking the total to $525,000, for failing to take action to rectify its salary cap problems despite being warned to do so. Smith said the club's governance had failed but he acknowledged that steps were now being taken to improve the systems.
He said the club would have until February 29 next year to undergo an independent governance review and implement the changes recommended by that review. This will include a review of the clubs organisational capability. If the club fails to satisfy these conditions it will start the 2016 premiership on minus four competition points.
"The salary cap is one of the reasons we have the closest sporting competition in Australia," Smith said.
"We have to continue to take a hard line against breaches, particularly where a club's governance and compliance systems are demonstrated to be inadequate. "This action is aimed at improving the underlying problems at the club which have caused this breach."
Smith said Parramatta would have an opportunity to respond to the breach notice before a final determination was made. The Sydney Roosters also face a fine of $41,292 for a breach of the salary cap rules. The breach relates to inaccurate reporting of education allowances in the club's NYC Top 20.
Despite their salary cap troubles Parramatta have already announced the big-name signings of Kieran Foran and Beau Scott for next season.
NRL's BIGGEST FINES FOR BREACH OF SALARY CAP
2010 - The Melbourne Storm are stripped of two premiership titles, three minor premierships, docked all points for 2010, fined $500,000 and ordered to return $1.1 million in prizemoney after over-spending the salary cap by $1.7 million over five years.
2002 - The NRL disqualify the Bulldogs from the 2002 final series, impose a $500,000 fine and a 37 premiership point penalty after detecting $1 million in salary cap breaches.
2015 - The NRL impose a $525,000 fine on Parramatta for salary cap breaches.
2006 - The Warriors are stripped of four competition points and fined $430,000 for breaching the salary cap by almost $1 million.
2014 - Gold Coast are hit with a $300,000 fine - $75,000 of which was suspended - over a salary cap breach involving former playmaker Scott Prince. A four-competition point penalty was also suspended.
- AAP
