What to do with excess contributions that were mistaken rolled over to

[Guest Plan the Man]

:confused: :confused:

Please help....

Excess contributions were rolled over from a terminated qualified plan along with the rest of the assets to a 401(k). Recently (July 2002), it has been discovered that there were excess matching contributions to 4 employees in 1999 and 2000. I've investigated the matter and found that it qualifies as a insignificant operational failure that can be corrected by a SCP.

The main problem : These excess contributions never should have been rolled over from the old terminated plan to the new 401(k). Therefore, they must be rolled back to the old terminated plan. In other words, the excess contributions belong to the old plan, thus, they cannot be put in a suspense account or simply transferred and used against future matching contributions. What can the employer do with this money so that the old plan is not disqualified (and thus would immediately tax all the rollovers) and what would be its tax treatment (i.e. 1099 forms, etc.)?

We greatly appreciate any help in this matter!

P.S.: The organization is privately owned.

[Brian Gallagher]

How 'bout this: pull the money (+/- earnings) from the new plan and recharacterize the money as ordinary income for the correct year, ie. re-issue 1099's (one H and one 8/P). Also, I'm thinking that the company will be on the hook for the 10% penalty tax for not timely removing the excesses.

[Alf]

What were the excesses? Were they refunded deferrals from a failed 401(k) test, refunded matchs from a failed match test, or refunded vested matches that related to refunded deferrals?

Also, you question only makes sense if the original plan was from an unrelated employer because otherwise, distributions from the terminated 401(k) plan wouldn't be permitted on the termination. Is thi correct? If so, the second employer should be entitled to rely on representations from the distributing plan that it was qualified and that the amounts were eligible for rollover. If this is the case, but the second employer finds out that these amounts should not be ERDs, the rollover regulations provide a mechanism for returning the money and you shouldn't have to worry about SCP.

[Richard Anderson]

Here's another possibility.

Were these "excess contributions" created because the matching contribution of 4 participants was calculated incorrectly, and they received matching contributions greater than they should have?

[Guest Plan the Man]

Yes, Richard, that is what happened. The matching contribution of 4 participants was calculated incorrectly, and they received matching contributions greater than they should have. Also, to answer a question above - the two plans are by the same employer and the original terminated plan was not a 401(k) but a money purchase plan. Any more advice? Thanks.