Jump to content

mistake of fact ER deposit


Recommended Posts

An employer deposited $15,000 more in ER PS contribution into a plan in 2007 than they should have. It was never allocated but is currently in a pooled account. Can they remove this, paid back to the ER, as a mistake of fact contribution and....thats it? Any penalities, fees, disclosures, etc.?

Thanks

Link to comment
Share on other sites

Guest Sieve

I assume that the PSP has a discretionary contribution, so I wonder how the contribution was $15,000 over--and I wonder what the "mistake of fact" really was. In any event, if it truly was a mistake of fact, and the plan permits those contributions to be repaid, then it can be repaid to the emploer. Interest ought to stay in the Plan, however.

But, you should look at IRC Section 4972. It has never been clear to me whether the "allowable as a deduction" language means that the excise tax applies only to amounts not taken as a deduction or to amounts which actually exceed the Section 404 deduction limits, so I don't really know if the excise tax applies in your case (although i suspect that it does). In any event, if the retuirn to the employer is within the timing limits (by the due date, as extended, for filing the 2007 corporate return), then no excise tax would apply (IRC Section 4972©(3)).

Link to comment
Share on other sites

the ASPPA course book for dc-1 describes mistake in fact as

"The IRS has not defined a mistake in fact. In Private Letter Ruling 9144041, the IRS suggested that only mathematical or typographical errors geneally will fall into this category. Merely because a contribution by the employer is not currently deductible does not make the contribution a mistake in fact."

(page 1-10 of the 2008 edition)

Doesn't sound like you fall into this category(?)

remember, even EPCRS states corrections should leave $ in the plan as much as possible.

you indicated $ was deposited in 2007 - was that for the 2007 plan year as well?

Link to comment
Share on other sites

Guest Sieve

Mistake of fact could also, for example, be making an advance contribution (early in the year when cash is available) into a PSP that has a %-of-compensation formula, when it eventually turns out that employee terminations, layoffs, etc. before year-end produce compensation much less than the figure on which the early contribution was based. The IRS considers this to be a mathematical (or actuarial) mistake of fact. That's why I wonder how--absent, e.g., a typo--the amount of a fully discretionary PSP contribution could ever be a mistake of fact. I think the mistake of fact would have to relate to something directly involving the plan (e.g., miscalcualting the company's profit for the year would probably NOT be a mistake of fact).

Link to comment
Share on other sites

What actually happened was that the ER had 2 plans, PS and MP. There was a required 5% of pay contribution to the MP that was around $15,000. Then there was the optional PS contribution of around $10,000. Miscommunication resulted in both amounts being deposited correctly, plus an additional $15,000 going into the PS plan.

So, the amount was discretionary, in total everything still falls under 25% of pay deductible limit. ER is OK with leaving the earnings in the plan. But would just like to take the $15,000 extra out.

The fiscal and plan year run 4/1 - 3/31. The deposit was made in May, 2007, for the 06/07 plan year. The MP plan was frozen as of 3/31/07, so there is only the 1 plan now. They company wants to make around a $5,000 PS contribution for the 07/08 plan year, which they can "deduct" from the extra $15,000 deposited in May, 2007. But the remaining $10,000 they would like to get back.

Still not sure if this falls into the mistake-of-fact reversal, but on the other hand, it seems a bit onorous that a company makes a deposit mistake into the plan and has no way to fix that problem.

Link to comment
Share on other sites

Guest Sieve

Remember, ERISA was enacted in part to protect "Employee Retirement Income" and provide "Security". For example, ERISA tries to protect aginst a situation where the employer contributes to a Plan, holds the funds unallocated, and then decides to remove the money a year or so later and return it to, of all people, lo and behold, the employer--sort of like what you want to do. :P Only in very limited circumstances, therefore, is return permitted--in fact, for a multiemployer plan the time limit for a mistake of fact return is just 6 months (IRC Section 401(a)(2)). Other returns to the employer from the trust are considered a diversion of plan assets (& maybe also a prohibited transaction), and will disqualify the plan (theoretically, that is) as a use of plan assets other than for the exclusive benefit of employees (IRC Section 401(a)(2).) So, the IRS and DOL don't think this result is onerous, by any stretch of the imagination.

For example, I wonder why it took a year to discover the error in this instance--that fact alone doesn't bode well for using the mistake of fact argument. Certainly, you should be able to get the excess contribution returned as a mistake of fact if you have a Board resolution or something comparable showing the amount of the approved contribution for the year (dated before the end of the plan year with respect to which the too-large contribution was made), which would show that the amount actually contributed was clearly in error. Otherwise, I think the better course of action is to retain the funds in the Plan and reduce that amount by each year's contribution until the excess contribution has been exhausted.

Link to comment
Share on other sites

  • 3 years later...

I'm adding to this thread along the theme of 'mistake-in-fact' and cotnribution deposits. in this case, calendar year MP plan sponsor makes monthly deposits. The following year (after July 31) it was determined that forfeitures occurred which reduced the actual required contribution, resulting in a nondeductible contribution. Think this can be considered mistake-in-fact?

Added to that, prior tpa didn't catch the over deposit so now 5330 for 2010 is late. Is that a prohibited transaction since the penalty was not paid and is now due .5% per month late. I'm not a 5330 expert but am hoping to attach a letter asking for waiver of interest and penalties due to mistake-in-fact, but I'm also not sure if i need to add this penalty to the 2011 form, similar to the ongoing penalties for late 401k deposits that are added for each year late. I'm thinking however that I don't add it to the 2011 form.

Link to comment
Share on other sites

As a practical matter you will never get the IRS to waive the interest. They are of the opinion the sponsor had use of the money interest is due. If you can show this was a one time event and procedures are in place to not let it happen they will give up the penalty most of the time.

The reality is the penalty is the expensive part. The interest is chump change.

My understanding is while there are mistake of fact rules out there they just give false hope. Everyone I know who has tried to study this issue comes to the same conclusion, as a general rule there is no such thing as a mistake of fact. In some very limited way there might be one, but they just don't happen very often.

By the way if you file the form 5330 the IRS will just send your client a bill for the penalty and I often times warn the client that is what is going to happen. Then I write the letter asking for the penalty to be waived. The letter demanding the penalty be paid will give instructions on how to ask for the penalty waiver. Like I said don't even bother with the interest it will have to be paid.

Link to comment
Share on other sites

Sieve - re the following excerpt from your post #4: "The IRS considers this to be a mathematical (or actuarial) mistake of fact." Have you ever had a case where the IRS actually said this, or have they said this at an ASPPA conference, or whatever? I would just find it reassuring if there was some backup for this position - I could see this happening as a real situation. Thanks.

Link to comment
Share on other sites

ESOP Guy - thanks. Unfortunately, the carryforward of 2010 into 2011 means there are nondeductible amounts two years in a row. At least 2011 is not late. I am advising client first to not make fourth quarter payments anymore, until such a time as plan can be amended to apply forfeiture in the year after.

So what you are saying is, include Tax with 5330 filing, but do not include penalty and interest until contacted. Fortunately the net total amounts are relatively small (under $250), not that client will be happy to learn this.

Link to comment
Share on other sites

Guest Sieve

Belgarath --

As it turns out, language to that effect appears in Treas. Reg. Section 1.401-2(b)(1): "errroneous actuarial computations". But that reg and the Code provison it describes (IRC Section 401(a)(2)) really only apply at termination of the Plan, which is the situation discussed in Rev. Rul. 71-149 (which determines that reversions in a DC plan are never permitted). The old Pub 778, which pre-dates ERISA, discusses the issue at Part III(d) & (e) (& which I think is the basis of the current reg--which also predates ERISA).

I have no direct authority for this that I can find, but I would think that a mathematical error in calculating the contribution when there is a specific formula for doing so in a DC (or contributing more than actuary told you to in a DB) should also permit removal of exces amounts from the Plan--as should a situation where a resolution by the Board calls for a PS contribution of $X but the contribution actually made is $X + $Y. I don't know if there's any specific authority for that position, however, but it would be mine.

Link to comment
Share on other sites

TPApril:

Yes pay the tax with the form but not the penalty. Try and get it waived. If you can't get it waived they will keep sending you a bill. The fact it was multiple years will make a waiver harder. But write your best letter and try and make it sound like it is really one mistake and now there is a procedure to stop it from happening in the future. You might get a waiver. Like I said interest is a lost cause.

Link to comment
Share on other sites

Thanks Sieve. I think your position is eminently intelligent and reasonable - but I'm less sure of IRS auditors. I've had a few conversations with folks with "contacts" at the IRS over the years, who indicated that unofficially, the IRS takes a pretty hard line on this. So just depositing based upon anticipated compensation in a DC plan, for example, might be pushing it.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...