Mistake of Fact

[Guest At Peace]

Please provide suggestions/guidance on this issue.

First year of plan (large plan, hundreds of participants) -

Intended that HCEs would not defer for first year - did not want to have an ADP/ACP test issue - however, employer failed to consider family members and therefore son of owner deferred to plan.

Can these deferrals be returned to the employer as "mistake of fact"?

It would appear that if within 12 months of plan year end, they could be returned and any gain may be distributed to employee. Any loss would reduce amount returned to er. (?)

What if paid directly to participant rather than employer? (no distributable event has occurred.) I'm thinking this isn't an option - cleaner if paid back to employer.

Please provide reference info, if any.

Thanks!

[Tom Poje]

1st year of plan, if you are using prior year testing, then the HCE avg can be 5%. Hopefully your document says to use prior year testing. This might require some refund, unless the kids deferred a high % I wouldn't think it would be a bad refund. Plus $1000 in catch up contributions!

[Guest At Peace]

3% not an option - about 1000 participants with very low % deferring - which is why it was determined they wouldn't pass and that HCE's shouldn't defer. Also, not eligible for catch-up contr. due to age.

EPCRS doesn't specifically address this situation that I have found. Also, I know mistake of fact is fairly limited in it's definition.

It would appear that an insignificant failure could be corrected under SCP and I have found in Q & A column where one opinion is that the correction is to distribute the erroneous deferrals and any earnings to the employee. I would think this is insignificant since it doesn't affect any NHCEs.

Do you see a problem with this solution? The files would be formally documented as to the timing of the failure and correction and method used, etc.

[R. Butler]

In regards to the 3%, the question isn't necessarily what the NHCE's are defering its whether the Plan tests using prior year or current year. If the plan uses prior year testing fro ADP, than the HCE group can automatically average 5% in the 1st year.

Are the HCE's excluded from participating in the document? If they are not excluded then there really is no error. You simply do the ADP test. If you fail make the refunds. And if you only have 1 HCE deferring, you may not even fail, particularly if you are using prior year.

[Tom Poje]

yes. and to make things even clearer. you do not make a 3% contribution to 1000 nhces. you simply assume they averaged 3% in the prior year. It is a freebie simply because the plan didn't exist. if this wasn't true, you could never use prior year testing on a new plan, because the average in the prior year was 0%.