What to do with "excess gains" after correcting amount of de

[Guest Sara H]

One of our employers incorrectly allocated deferral money to employee A rather than employee B. In calculating the correction to make each employee as they would have been had the error not occurred, an "excess gain" occurs. Does anybody have any suggestions of what to do with that extra money? Does it get split between the two employees or does it get forfeited?

[Guest JEP]

If employee B was not entitled to any of it and employee A has been made whole, the excess could be forfeited and used by the employer in the same manner as other forfeitures.

[Guest GMedley]

This is an issue we have struggled with for some time. I haven't been able to find a good answer in the regulations. Some errors resulting in gains clearly should be left with the participant(s), but other gains don't really seem to belong to anyone.

Some companies have a single account they use for error corrections. Errors resulting in losses are made whole from that fund, & gains resulting from errors that cannot be logically given to someone are put into that fund. I think it's safe to say that your losses will exceed your gains in the long run.

We have tended to allocate gains from trading errors to all participants in the account, or use it to reduce the fees charged to the sponser. We are not satisfied with the approach & are investigating alternatives.

I'm curious where JEP gets his rationale for using it as forfeitures. I'd also be curious as to what others do.

thanks,

Grant

[Guest UKH]

I agree with JEP's rationale to forfeit the excess and use it down the road based on how the Plan is set up to use forfeitures.

GMedley- In other words if the Plan document did allow to collect fees from the forfeitures account, I do not have any problem with the practice.

I however do have a little concern regarding creating an error account and placing funds in such an account. To me during an audit that would just create more problems and may want the IRS to dig into the matter and investigate all errors more closely. I have heard about the error accounts but I would stay away from such practice.

[Guest Sara H]

What are your thoughts on just splitting the extra gains between the two participants who are involved? Should the company really benefit from the error that they caused?

[Guest GMedley]

It doesn't seem to me that the two employees in question deserve the gain anymore than anyone else. Although, if statements had already been issued to them, it would seem reasonable to only take the contribution itself away from Employee A, & not the associated earnings. This is the approach we have generally taken with this particular type of error. If the erroneous deposit resulted in a gain for the participant, he/she can keep the gain. If it resulted in a loss, the company (or whoever was responsible for the error) should make it whole.

I appreciate the input of JEP & UKH on this issue. I'm truly interested in how other people handle this. What I'd like best is some regulatory guidance. Does anyone know of any official word on how to handle this? I've searched the BNA site we use for IRS & DOL regs, but couldn't find anything. Maybe I'm not using the proper keywords. Just curious if anyone else has seen anything official on this.