FICA Alt Plan and Excess Contribution

[JOH]

Hi all- looking for some guidance. I have a FICA Alt plan established under a 457plan. The employer made 3 contributions (contributions were done in 2022 and just recently) for an employee who was no longer eligible to participate in the plan. Can the employer request the funds back and can we just send the funds back to them. I wasn't sure if that was allowed for FICA Alt plans. Any guidance would be appreciated. 

[Peter Gulia]

A governmental § 457(b) plan and its trust or trust substitute include provisions designed to meet Internal Revenue Code of 1986 § 457(b)(6), which require that “all assets and income of the plan . . . are held in trust for the exclusive benefit of participants and their beneficiaries.”

Analogizing to a recognized exception from ERISA’s exclusive-purpose command and Internal Revenue Code § 401(a)’s exclusive-benefit condition, some governmental § 457(b) plans include a provision for returning a contribution an employer made by a mistake of fact.

ERISA allows “[in the case of a contribution . . . – if such contribution or payment is made by an employer to a plan (other than a multiemployer plan) by a mistake of fact, paragraph (1) [about noninurement and exclusive-purpose commands] shall not prohibit the return of such contribution to the employer within one year after the payment of the contribution[.]”

ERISA § 403(c)(2)(A)(i) [29 U.S.C. § 1103(c)] http://uscode.house.gov/view.xhtml?req=(title:29%20section:1103%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1103)&f=treesort&edition=prelim&num=0&jumpTo=true

See also Internal Revenue Service Revenue Ruling 91-4, 1991-1 C.B. 57. http://www.legalbitstream.com/scripts/isyswebext.dll?op=get&uri=/isysquery/irl466b/1/doc.

If the plan has such a provision, the plan’s sponsor and administrator might want its lawyer’s advice about whether the circumstances fit the plan’s provision.

JOH, if you want BenefitsLink neighbors’ help about whether the employer’s error fits tax law’s concept of a mistake of fact, you might describe in more detail what mistake caused the employer to pay a contribution the plan did not provide. For example, did the employer pay over the contribution with someone within the employer not knowing that the employee’s classification changed from one that gets an alternative-to-FICA contribution to one that does not get that contribution?

[Carol V. Calhoun]

Another alternative to look at is simply to leave the money in the plan, but determine that the employee is not entitled to it.  The money could then be offset against the employer's next contribution obligation.  So long as there are other employees entitled to receive contributions, this would have the same financial effect as giving the money back to the employer, without the problematic issues that come up when you actually take money out of the plan.

[JOH]

Thank you all.