Mistakenly made a Safe Harbor Match Contribution

[Alex Daisy]

A Company decided to stop the Safe Harbor Match Contribution effective

5/1/2009 (proper notice was given), but mistakenly submitted contributions for the 5/1/09 and 5/8/09 payrolls that include the Employer Safe Harbor Contribution.

What is the correct way to handle getting the Employer Safe Harbor contributions out of the participants accounts?

Can it go back to the Employer or does it have to stay in the Plan in a Forfeiture account?

The company wants the money returned to them, and not left in the Plan as a Forfeiture.

[BG5150]

I would forfeit the money, and use it to offset the next few contributions.

(And I am considering sdalary deferrals as Employer contributions for this purpose)

[Alex Daisy]

I would forfeit the money, and use it to offset the next few contributions.

(And I am considering sdalary deferrals as Employer contributions for this purpose)

How can Foefeited Safe Harbor Employer Contributions be used for Employee Salary Deferrals? Is that Possible?

[BG5150]

In some of the documents I've worked with, deferrals are considered Employer elective contributions. (To me, the only true employee contributions are after-tax and rollover contributions)

So, I've always considered deferrals as an acceptable source for forfeiture money to cover, unless the document specifically says that match forfeitures must go to cover the ERs matching contribution for the year. (Some docs say that match forfs pay for match and PS forfs pay for PS, but some just say that forfs go towards the ER's contribution.)

But these aren't normal forfeitures of non-vested contributions. They were mistaken contributions. Becuase they have already been invested int he trust, I think they should be removed fromt he accounts and placed in a suspense account (which the forfeiture account often doubles as), and used to pay for the next employers contribution.

It's really a zero-sum game that keeps any plan assets from being reverted to the Employer. Say for example, the amount to be "forfeited" is $500. And the next total deferral cotnribution totals $4500. Instead of the company writing a check for $4500 and getting a rebate from the plan of $500 (net -4000 from company, +4000 to plan), the company merely sends in $4000 and the record keeper uses the $500 from suspense to true-up the amount (net -4000 from company, +4000 to plan).

[401king]

In some of the documents I've worked with, deferrals are considered Employer elective contributions. (To me, the only true employee contributions are after-tax and rollover contributions)

So, I've always considered deferrals as an acceptable source for forfeiture money to cover, unless the document specifically says that match forfeitures must go to cover the ERs matching contribution for the year.

I have always been under the assumption (which is backed by the document system I use) that forfeitures can never be used to cover EE contributions. Could someone please clarify if I am under the wrong impression, as a whole? Is it simply the docs that I use (DATAIR) that don't allow the forfeitures to offset EE cont.?

[Kevin C]

BG5150, what do the documents you work with say about the timing of salary deferral contributions?

1.401(k)-1(a)(3)(iii)© Contribution may not precede services

(1) General rule. --Contributions are made pursuant to a cash or deferred election only if the contributions are made after the employee's performance of service with respect to which the contributions are made (or when the cash or other taxable benefit would be currently available, if earlier).

(2) Exception for bona fide administrative considerations. --The timing of contributions will not be treated as failing to satisfy the requirements of this paragraph (a)(3)(iii)© merely because contributions for a pay period are occasionally made before the services with respect to that pay period are performed, provided the contributions are made early in order to accommodate bona fide administrative considerations (for example, the temporary absence of the bookkeeper with responsibility to transmit contributions to the plan) and are not paid early with a principal purpose of accelerating deductions.

[QDROphile]

Are you under a misimpression about what is an employee contribution? An employee contribution is after-tax.

[BG5150]

From Corbel's VS:

"The amount by which Compensation is reduced shall be that Participant's Deferred Compensation and be treated as an Employer Elective Contribution and allocated to that Participant's Elective Account" (emphasis mine)

As for the timing: I'm not saying to wait until the end of the year to allocate this money. It should be used right away, of course. Just because the ER withholds $50 form an EEs paycheck, doesn't mean the ER must send to the trust $50. If there is money in the suspense account, it can be used for that. This is assuming no aspect of the plan dictating that match forfs must be used to offset other match contributions.

[QDROphile]

The 401(k) timing regulations are not relevant. This is not a contribution arrangement, it is a correction of an unrelated operational error. Corrections are also typically outside of plan document terms. I would not even use the term forfeit. The participant never had an interest in the mistaken contribution. One must have an interest before one can forfeit it. Aside from fine points of terminology, I subscribe to BSG150's position.

[K2retire]

In some of the documents I've worked with, deferrals are considered Employer elective contributions. (To me, the only true employee contributions are after-tax and rollover contributions)

So, I've always considered deferrals as an acceptable source for forfeiture money to cover, unless the document specifically says that match forfeitures must go to cover the ERs matching contribution for the year.

I have always been under the assumption (which is backed by the document system I use) that forfeitures can never be used to cover EE contributions. Could someone please clarify if I am under the wrong impression, as a whole? Is it simply the docs that I use (DATAIR) that don't allow the forfeitures to offset EE cont.?

Yes, deferrals are technically employer contributions. However to qualify as an elective contribution they cannot be deposited to the trust before they are withheld from pay. Since these funds were already deposited, they cannot be used to offset a deferral contribution.

[Bird]

I agree with QDROphile - "forfeit" is an inappropriate term, but I wouldn't have a problem with removing those erroneous deposits from the participant accounts and "recharacterizing" them as deferral contributions as suggested. Yeah, I know that deferrals can't be deposited before they are withheld and all that, but the idea that you can't make a mistake without fixing it in a reasonable manner is a little much.

Having said that, I would not return the money to the employer as desired in the original post.

[Kevin C]

Just because the ER withholds $50 form an EEs paycheck, doesn't mean the ER must send to the trust $50.

The 401(k) timing regulations are not relevant.

I disagree with both of you. But, ignoring the regulations for a moment, what do your plan documents say? Ours say that amounts deposited before the earlier of 1) the performance of services with respect to which the deferrals are made, or 2) when the cash subject to the CODA election is currently available, can not be counted as either salary deferrals or matching contributions. If your documents comply with the final 401(k)/401(m) regulations, they will have similar language.

[QDROphile]

"Corrections are also typically outside of plan document terms."

[K2retire]

I agree with QDROphile - "forfeit" is an inappropriate term, but I wouldn't have a problem with removing those erroneous deposits from the participant accounts and "recharacterizing" them as deferral contributions as suggested. Yeah, I know that deferrals can't be deposited before they are withheld and all that, but the idea that you can't make a mistake without fixing it in a reasonable manner is a little much.

Having said that, I would not return the money to the employer as desired in the original post.

Using them to reduce a subsequent non elective contribution, or even a subsequent discretionary match IS a fix. I just don't believe that employer money can be used to reduce subsequent deferral deposits.

[BG5150]

I just don't believe that employer money can be used to reduce subsequent deferral deposits.

Why not? Deferrals are employer contributions.

[KED]

Under EPCRS and the "Correction of Excess Amounts," it states that excess amounts should be placed in a separate account established for the purpose of holding excess allocations " to be used to reduce employer contributions (other than elective deferrals) in the current year or succeeding year(s)." This gives an indication of the IRS position on the subject.

[Kevin C]

The amount can only be deferrals if it meets the requirements to be deferrals. The regulations say prefunded amounts are not deferrals. The document should say the same. Your proposed correction creates another operational failure.

Rev. Proc 2008-50, section 6.02(2)(d):

(d) The correction method should not violate another applicable specific requirement of § 401(a) or § 403(b) (for example, § 401(a)(4), § 411(d)(6), or § 403(b)(12), as applicable), § 408(k) for SEPs, or § 408(p) for SIMPLE IRA Plans, or a parallel requirement in Part 2 of Subtitle B of Title I of ERISA (for plans that are subject to Part 2 of Subtitle B of Title I of ERISA). If an additional failure is nevertheless created as a result of the use of a correction method in this revenue procedure, then that failure also must be corrected in conjunction with the use of that correction method and in accordance with the requirements of this revenue procedure.

The CODA must be a qualifed CODA if you want to satisfy 401(a). I'd say that makes the 401(k) timing regulations relevant to the correction.

I agree the funds should not be returned to the employer. They should be allocated correctly under the terms of the plan. The plan should say the funds can't be used towards future deferrals or future match.