Mistaken contributions...

[Guest RONNIE WASEL]

Plan has about 20 instances of the following...

Participants in a 401k plan terminate and are consequently paid out correctly.

Payroll system of employer withholds 5% on the employers last check a couple of weeks after termination and after participant has been paid out.

Therefore, there are about 20 accounts with less than $50 in total that has been erroneously contributed.

What are the options on correctly this and getting the immaterial amounts paid to the employees? These amounts should never have went into the plan, they should have been on the final paycheck as compensation.

Can the employer just have the investment firm by out the immaterial amounts of the 20 accounts to the employer then the employer issue checks to the participants for the compensation due?

Thanks,

Ronnie Wasel

[Belgarath]

Lots of folks may disagree with me on this one. I'm of the opinion that unless the plan language or deferral forms specifically state that no deferrals will be accepted after the termination date of the participant, then you have a valid deferral and contribution to the plan. If so, then you have to jump through all the normal distribution hoops. You can't just "undo" it.

It has always seemed to me that on such issues, the IRS and DOL take a "form over substance" approach, and it would be wiser to err on the side of caution.

[Guest RONNIE WASEL]

Does that mean that these participants will get 1099's for $12 and such?

Its seems like it's a long process for monies that were not meant to be contributions.

[Belgarath]

Yes, they would get 1099's. And I agree it is a lot of work. But you may get some opinions that you'll like a lot better! As I said, I take a pretty conservative view on this issue, and other folks may think I'm crazy.

[RTK]

For what it's worth, I agree with you Belgarath. Actually, I find it interesting that that the paperwork and payment could routinely be processed so quickly to generate 20 cases. Given the notice and 30 day requirements, the typical lag in getting elections from terminated employees, and the time to authorize and have payment made, I can't recall this issue coming up very often.

[MGB]

I agree that these WERE contributions and should not have been considered taxable pay on the last pay check. There is no authorization under the law to disregard the employee's request to defer this money. The fact that the last paycheck was paid after termination of employment is irrelevant. The pay was for services while an active participant and is the only thing that counts.

I suggest changing your procedures to not cash out people before their last paycheck is processed.

[JanetM]

We have the same problem on occasion due to some old timers who still have company stock. If we distribute account and there remains funds - we just do another distribution in the same manner as the first. If participant did rollover - we send additional amount to the same IRA/Plan. If they took cash - we send them a check.

[rcline46]

Does the plan contain a force out rule? If so, just issue the check to participant, withholding the same as on prior distribution (if <$200 and prior was R/O then no WH, if prior had WH do again regardless of current amount), issue 2 1099's at year end if necessary.

If not then either use prior form for issuing 'additional' checks. If too agressive for you, the go through the whole procedure again.

Then stop issuing distributions until last payroll has cleared!!!!!