Refund of mistaken contribution

[Guest ETodd]

Profit sharing plan maintains a separate brokerage account for each plan participant. The plan has over 100 participants.

The plan mistakenly contributed too much to a participant's account. The mistake was a "mistake of fact".

This is not a multiemployer plan.

The plan refunds the contribution to the employer .... but according to IRS regulations and the plan document, the plan CANNOT pay/refund to the employer , the interest earned on the contribution (while the contribution was in brokerage account).

MY QUESTION:

What is the plan supposed to do with the interest ? The participant has recently quit. She was only 40% vested. The plan disbursed her 40%. The brokerage account still holds the 60% forfeiture plus all of the interst earned on the mistaken contribution. The 60% forfeiture will be used to reduce next year's plan contribution. But waht about the interest ?

[david rigby]

Send it to me.

[Guest Luke Bailey]

I'd be interested in what others have to say about this, but I think that you might be able to use the amount as an offset to future contributions by the employer, either on general trust accounting principles or by treating it as a forfeiture. Although this would provide the employer with the benefit of the amount in question, it would not be removed from the plan, and I think the prohbition on the refund of earnings back to the employer should be read literally, i.e., as prohibiting only the refund, i.e., actually taking plan assets out of the plan, not the use of those plan assets to provide benefits for other participants, even if that produces a collateral benefit for the employer. The case is much clearer where the contributions being offset are discretionary under the plan's terms, e.g. a discretionary match. Where the amount satisfies a fixed obligation of the employer, I guess there would be an argument that there was a use of plan assets to benefit the employer, and therefore a prohibited transaction, so I would be cautious if the contribution being offset is fixed.

Assuming you do use it as an offset to contributions, whether I went with the "general trust accounting principles" or "forfeiture" rationale would depend on plan language.

If for some reason you don't go with the above, the plan may have been drafted well enough to have a provision covering amounts that are not "otherwise allocable" to any participant's account, which would probably best describe this amount. If your plan has such a provision then this amount would typically be available to pay plan expenses.

Whatever you do, you need to be consistent with plan language or at least a plausible interpretation of the plan's language.

Note that if this were a plan without individually directed investments, the trust's accounting provisions would almost certainly require allocation to other participants proportional to their account sizes as additional investment gain. Like much of ERISA, the rules are less clear when you apply them to individually directed accounts, since with the exception of 404©, ERISA was really not drafted with individually directed accounts in mind.