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ineligible employee for pension & mandatory employee contributions


alexa
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We are a governmental agency and have a defined benefit plan whereby employees are required to contribute a % of pay.

We have a temporary employee who inadvertantly had the pension amount withheld from her paycheck for 2 tax years (2014 & 2015)

She has terminated employment and is asking for a refund of those employee contributions.

I mentioned to payroll that thye would have to refund the contributions withhled from her paycheck

They said they could not due to being 2 tax years

We do refund those who terminate non-vested their employee contributions plus 4% annualized interest. We do not have an account established for each employee.

Our attorney is saying she cannot be refunded through the pension plan and get a Form 1099 distribution

But Payroll Mgr isn't budging

Any alternatives?

thanks

Lexy

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It is clearly the employer's responsibility to refund, not the plan's. It was the employer that erroneously sent the contributions. The amounts contributed would have been wages if correctly paid at the time to the employee instead of the plan. Thus, to put her back in the position in which she should have been, they should be wages (not pension distributions) now. Moreover, depending on her age, distributing them them from the plan could result in the 10% additional tax.

Unfortunately, I cannot think of any alternatives if the Payroll Mgr is not budging. All you can do is tell the employee that it is the employer which is responsible for the refund, and that she needs to pursue the issue there.

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One possible route: prove (in writing) that the ER made the mistake. If the Payroll Manager won't acknowledge it, then take it up the line.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Listen to Carol. The employer withheld monies from employee that shouldn't have been withheld. The employer needs to make the employee whole. Did the employer violate minimum wage laws? Did the employer fail to pay a union worker what they were entitled to? Are there contractual obligations or remedies that would apply? Whatever is required, they must do. Payroll manager should listen to attorney and do what Carol said (make employee whole, including contractual penalties, if any).

If temporary employees are not eligible for the plan, then the plan is not involved. It never received monies attributable to employee and, even if it had, since employee not entitled to have money in the plan, the plan's obligation would be to repay the plan sponsor (or to use the funds to settle up with the plan sponsor vis-a-vis other funds that are due).

I have no words to describe the payroll manager. Essentially, because of the payroll manager's incompetence an employee had a portion of their paycheck stolen by the agency and now the agency's representative is refusing to allow the agency to recognize its error and make things right! This is the sort of governmental misconduct that makes for a great story in a national magazine.

Maybe the payroll manager isn't cooperating because this is a systemic issue affecting a lot of employees. Maybe no cooperation because the funds have been embezzled by the payroll manager? Obviously, not terribly likely, but why else would the payroll manager not budge?

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I don't know what is the issue because several plan provisions have not been explained.

Why did the payroll mgr say that contributions withheld could not be refunded because of two tax years?

What is significance of two tax years? Is she vested in plan after two tax years?

Don't need to involve violations of wage hour law- not relevant to question.

Payroll mgr may not have authority to refund contributions because they were remitted to pension plan and employer/mgr is not allowed to refund contributions after they are sent to plan.

What are the options that are available to the employee?

mjb

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mbozek, what part of "ineligible employee" in the title is consistent with your musings?

I agree that, as with many posts to this forum of late, the question is not fully baked.

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I don't know what is the issue because several plan provisions have not been explained.

Why did the payroll mgr say that contributions withheld could not be refunded because of two tax years?

What is significance of two tax years? Is she vested in plan after two tax years?

Don't need to involve violations of wage hour law- not relevant to question.

Payroll mgr may not have authority to refund contributions because they were remitted to pension plan and employer/mgr is not allowed to refund contributions after they are sent to plan.

What are the options that are available to the employee?

Based on my understanding of the situation, the employee never became a participant in the plan, by virtue of not meeting the plan's eligibility requirements. It is the employer, not the plan, that sounds like the appropriate party to refund the amounts and to otherwise do anything needed to make the employee whole. The employer erroneously collected money from the ineligible employee and the employer (even if unable to retrieve the money from the plan) ought to have to absorb all of the cost (including any tax issues affecting the employee). Whether the employer can get the money back from the plan is their problem. So what if the employer is out the money and the plan reaps a windfall? The mistake was entirely the employer's. Granted, the employee cannot roll the money over to an IRA since the employee is not entitled to any plan benefits. If the mistake wound up messing up the employee's taxes, again, it is up to the employer to fix that.

Agreed that a 1099 would not be appropriate. nor would the employee have to pay the early distribution excise tax. Not a distribution from a pension plan.

Did anyone force the employer to exclude temporary employees from the plan?

Always check with your actuary first!

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Did anyone force the employer to exclude temporary employees from the plan?

Exactly! Perhaps this is the tip of the iceberg?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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The significance of the 2 tax years is that the withholding of mandatory employee contributions ;i.e. pickup contributions, occurred in both 2014 & 2015

Payroll Mgr is saying he would have to amend employee's 2014 W-2

My question is can this just be refunded through payroll and reported on 2015 W-2

The amount is <$500:)

I would feel more comfortable doing this than a Form 1099 plan distribution

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The agency needs to make the employee whole (where have I heard that before?). It seems like the employee can be made whole by treating 2014 and 2015 as follows. FICA has already been paid and reported for both years on the erroneously withheld monies. That makes things a bit messy. The payroll manager is correct in that a pure correction for 2014 pays the employee for the withheld amounts and changes the W-2 to reflect taxable income that wasn't previously reflected, followed by the employee revising his/her 2014 tax return if it has already been filed. In this case the employer should pay whatever accounting fees the employee is stuck with. In addition, the employer should increase the refund to reflect interest lost in the interim. A spreadsheet will make this task relatively easy, but your payroll manager sounds like any effort is too much effort. You do the same thing for 2015 as far as the employee is concerned, but the correction is made before the end of the year so the W-2 for 2015 will be correct when issued.

Fixing a screw up is never painless.

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The significance of the 2 tax years is that the withholding of mandatory employee contributions ;i.e. pickup contributions, occurred in both 2014 & 2015

Payroll Mgr is saying he would have to amend employee's 2014 W-2

My question is can this just be refunded through payroll and reported on 2015 W-2

The amount is <$500:)

I would feel more comfortable doing this than a Form 1099 plan distribution

No 1099 would be appropriate - it would be my understanding that as the participant was not eligible to be a participant, there would be no distribution to the participant from the plan. Everything is handled from the employer's own funds. It would then be between the employer and the plan as to whether any of the erroneous contributions are to be returned to the employer (if permissible).

Always check with your actuary first!

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I suspect Mike Preston's intuition is correct. The payroll manager either has known about a systemic problem for years but kept quiet and now someone's calling him on it, or he has now learned that he has a systemic problem well beyond this one employee. Either way he is paralyzed by fear.

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In order for the employee to get a refund of contributions everyone needs to understand the following principles:

1. State and government pension plans are exempt from ERISA so none of the ERISA protections including the provisions filing a claim for benefits apply. State govt employees only apply state law and regulations which are both arcane and opaque and they have little discretion to act on cases that are not in the playbook for payroll or pension plan administration. Under state budgetary laws all budgeted amounts are allocated to specific programs or areas delegated under state law and no unauthorized distributions can be made.

An employee can only receive a refund of contributions if a refund is authorized.

2. State civil service laws protect govt employees from disciplinary action for making mistakes or violating rules. There is little recourse if a state employee will not use discretion to act. Payroll manager doesn't care if there is systemic problem because it exists under state law and he cannot be disciplined for not fixing it.

3. Only way for the employee to get the refund is to find the person in the state govt hierarchy who is authorized to resolve the problem. If the payroll mgr. will not resolve the problem the employee should contact her state senator or reps office and ask for assistance in contacting the proper party in the state govt who can assist in getting the refund. I recently assisted a NJ worker whose unemployment benefits has been stopped because she was late in filing her claim online. The phone # she was supposed to call to reopen her account was always busy for over a month. Her state senator gave her the direct line to a manager in the unemployment dept who was able to open her account and pay back benefits. The employee can also find out if there is an ombudsman or advocate at the state employer who can assist with the refund.

4. Although several posters believe the employee should receive an equitable payment to make her whole she will only receive the amount permitted under state law. Interest will only be paid if required under state law.

mjb

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Mbozek- interesting about state law & interest

Does state of PA require interest on the refund?

Our pension attorney suggested adding some interest. We refund non-vested eligible participants at 4% on their employee contributions in the pension plan.

Thanks

Lexy

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