Correction of Governmental 457 Plans

[Guest GBMcGrath]

Is there any way to "fix" a defect in a 457 plan? Specifically, the 457 plan participant made a deferral election, but the employer failed to follow the election. Now the year has closed, the error has been discovered, and the employee would like the deferral election to have been followed. Could the employer make the contribution on behalf of the employee and issue a corrected W-2? In such a case, the employee would reimburse the employer for the contribution.

[Guest CVCalhoun]

There are really two questions here:

1. Can the employer correct the defect, i.e., can the employer's contribution for year 1 count against the $8,000 limit for year 1 rather than year 2, even if it is made for year 2?

2. Can the employee's Form W-2 for the prior year be corrected?

As to the first question, there is some language in the regulations under Code section 415 which may be helpful, at least by analogy. What it says is that if an employer mistakenly fails to make a contribution to a qualified plan in one year, and corrects the problem in a later year, the contribution can be counted against the earlier year's 415 limit.

However, the Form W-2 for the earlier year cannot be amended, because that year has now ended. Under the VCR program for 401(k) plans, the standard correction would be for the employer to make the contribution, without deducting the amount from the employee's paycheck. However, the employer is unlikely to be pleased with this approach.

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Employee benefits legal resource site

[Note: This message has been edited by CVCalhoun]

[Guest PeterGulia]

Consider the common law of contracts doctrine of account stated.

By accepting his/her unreduced paycheck (probably many of them) without complaint, the employee ratified what amounts to a revocation of the salary reduction agreement.

Alternatively, the employee can recognize that s/he received payments that s/he was not entitled to, and return them to the payor. Then, the employer can perform its end of the agreement.

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