Hello. We have discovered that a client with a 401k plan has deposited a corrective contribution into the wrong participant's account. We are aware that Section 10.01(c) of the plan document allows the Employer to withdraw mistake-in-fact contributions within a year after the incorrect deposit. Unfortunately, a little over a year has passed since the incorrect deposit was made. We are trying to determine if the plan document addresses this issue. We have asked the document provider for comment, but no word as of yet. I would think that the participant who received the incorrect deposit is not entitled to the principal, but is entitled to any investment gain. If there is investment loss (highly likely), the principal amount deposited would absorb its share of the loss. But the question is, what happens to the adjusted (in the event of investment loss) principal? According to the plan document, the Employer can't take it back. What are your thoughts in dealing with this issue? The participant in question is requesting a distribution. Thanks in advance for your help.

You definitely need feedback on the document. In most cases the funds would go to a forfeiture account.

Yep. Got the feedback, all is sorted.
Thanks for the reply.

I'd like to know how it was a mistake in fact. It was a plain ol' mistake. No facts were messed up, just the processing.

...and since all the accounts are just part of the plan, wouldn’t it be OK to just move the contribution + earnings to the right participant’s account balance account; with instructions from the trustee?

Appleby

I would agree with you. However, what would you do if you had a loss in the account. Would you figure out what the ee would have had in the account, had the money been deposited correctly, and then transfer that amount? Or would you treat it as a late contribution and then deposit the principle plus the interest.

I am assuming that the financial institution would have to pick up any losses to make the employee whole as it was their fault?

EPCRS (recently updated Rev. Proc 2008-50) addresses this type of (Operational Failure) issue. In essence, the idea is to make all affected participants whole - like they would have been had they error not occurred. The principal and "applicable earnings" should be withdrawn from the wrong account and transferred to the right account. Correction principals are in EPCRS Sect. 6. and the correction methods are listed in Appendix A.