Excess 403(b) match - any thoughts?

[ERISAatty]

I haven't seen the answer to this question in earlier posts.

A not-for-profit employer maintains a safe-harbor 403(b) plan (no discrimination testing) under which employees receive a 4% employer match for their elective deferrals.

Inadvertently, the employer over-contributed with respect to the matching contributions for a highly compensated employee. Namely, the employer failed to observe the $200,000 limit.

I am trying to figure out the best correction method.

I'm thinking of:

1) Since the HCE never should have received the excess $$, under the Plan, the Company should forfeit it (and then no-one gets taxed, or has to file an amended tax return, etc.),

2) Treat the excess as after-tax contributions, and leave the excess in the Plan (but I'm worried that might necessitate an ACP test),

I'm hoping that choice #1 can work out. I'm assuming that this can be corrected under EPCRS as an operational failure.

I'm not finding enough authorty on this to feel comfortable yet. Any thoughts? Thanks much!

[Guest getaxa]

I have the same problem but a school system over contributed employer contributions to several participants. My main questions is because the 403(b)s are individually owned accounts does the employer have the right to take $ out of the 403(b)s? What happens to the gains or loses attributed to the over contributions? Any thoughts would be appreciated.

[Guest DMK]

I've got the same issue as in the original post -- the 401(a)(17) compensation limit was disregarded in the match calcuation. Under 403(b), this is a discrimination violation. Is the whole plan in jeopardy or just the affected accounts/excess amounts? Anyone have any answers on this one, including the best way to correct? Also thinking about whether the excise tax on excess contributions under 4973© might also apply . . .

[Guest SuzieQNEC]

Any thoughts on the above questions? In my case, the 403(b) plan overmatched a participant for the 12/31/06 plan year. What are the options now? Take it out of the account and give back to the emloyer? Would there be excise taxes?

[TLGeer]

I've got the same issue as in the original post -- the 401(a)(17) compensation limit was disregarded in the match calcuation. Under 403(b), this is a discrimination violation. Is the whole plan in jeopardy or just the affected accounts/excess amounts? Anyone have any answers on this one, including the best way to correct? Also thinking about whether the excise tax on excess contributions under 4973© might also apply . . .

Ahh, there's the fun issue. Yes, ignoring 401(a)(17) is a nondiscrimination violation. Under the second and third sentences of Regs. 1.403(b)-3(d)(1)(ii), the effects are not limited to the individual employee. Everyone is at risk.

When considering corrections, the first questions is what would the correction be for the same violation in a 401(k) plan. The possibility of re-administration (forfeiture and reallocation, a la ERISAatty) also has to be considered. I do not consider reclassifying as after-tax and leaving in the plan as a correction at all; if you disagree and try this route, note that the match is already subject to ACP, so making it after-tax would not change the ACP test numbers at all.

No, 4973 does not apply. With respect to 403(b), it only applies if the amount exceeds the annual maximum.

Corrections issues, and who gets the privilege of paying for them, are by no means clear in the current state of flux/transition. This makes for very complicated decision making that simply is not suitable for a forum that never gets all the facts. The IRS has not, and probably cannot, say that prior year violations will be ignored, but may cut some slack based on the ordinary state of people's knowledge. Also, absent the regulations (i.e., prior years) the meaning of "contract" is hardly crystal clear. Factoring in the fascinating questions about who gets to pay for the correction, it is simply too complex, and too individually variable, a set of issues for an abstract forum. No one in their right minds will provide definitive answers, and I am feeling unusually sane (other than the obvious fit of insomnia) today.

Tom Geer

[Lori H]

we have a similar situation. a non profit plan allows participants to defer upon date of hire, but must wait 2 years to receive match. well the employer goofed and started matching immediately. refund to employer? move to a forfeiture account? YIKES

[Peter Gulia]

On the situation that getaxa describes, whoever is considering the alternatives for corrections might first consider whether ANY employer-provided contribution was lawful. In many States, a public-schools employer has authority only to pay over salary-reduction contributions, and lacks authority to provide a nonelective or matching contribution. If a payment was beyond a governmental employer's State-granted powers, relevant States' laws might require an insurer or custodian to return each mistaken payment. (Often, an investment organization's unawareness that it received money the payer lacked authority to pay is not an excuse or defense; instead, States' laws often hold a financial-services business to a strict standard in dealing with a government.) Moreover, the government might have a right to get its money back without investment losses and with interest. Finding the answers to these questions calls for a close look at State statutes, regulations, Attorney General opinions, and court decisions.

[Guest mjb]

we have a similar situation. a non profit plan allows participants to defer upon date of hire, but must wait 2 years to receive match. well the employer goofed and started matching immediately. refund to employer? move to a forfeiture account? YIKES

Was the match immediately vested?

What does the insurance contract or custodial agreemernt provide for a return of mistaken contributions? If the funds were contributed to an individual contract/agreement owned by the employee there can be no return without the employee's consent because the employee owns all the rights to the contract.

[Lori H]

we have a similar situation. a non profit plan allows participants to defer upon date of hire, but must wait 2 years to receive match. well the employer goofed and started matching immediately. refund to employer? move to a forfeiture account? YIKES

Was the match immediately vested?

What does the insurance contract or custodial agreemernt provide for a return of mistaken contributions? If the funds were contributed to an individual contract/agreement owned by the employee there can be no return without the employee's consent because the employee owns all the rights to the contract.

thanks mjb. Thats what we were afraid of. Yes, the match is 100% vested. I take it the sponsor would need to get a letter from the participant allowing for the return from the contract.

[Guest mjb]

we have a similar situation. a non profit plan allows participants to defer upon date of hire, but must wait 2 years to receive match. well the employer goofed and started matching immediately. refund to employer? move to a forfeiture account? YIKES

Was the match immediately vested?

What does the insurance contract or custodial agreemernt provide for a return of mistaken contributions? If the funds were contributed to an individual contract/agreement owned by the employee there can be no return without the employee's consent because the employee owns all the rights to the contract.

thanks mjb. Thats what we were afraid of. Yes, the match is 100% vested. I take it the sponsor would need to get a letter from the participant allowing for the return from the contract.

I think there will be a problem in transferring the funds back to the employer since it would not be a a tax free transfer or rollover from the employee's account (another Q is what would be the event that allows a distribution from the contract?) It many be best to just not to do anything.

[Lori H]

we have a similar situation. a non profit plan allows participants to defer upon date of hire, but must wait 2 years to receive match. well the employer goofed and started matching immediately. refund to employer? move to a forfeiture account? YIKES

Was the match immediately vested?

What does the insurance contract or custodial agreemernt provide for a return of mistaken contributions? If the funds were contributed to an individual contract/agreement owned by the employee there can be no return without the employee's consent because the employee owns all the rights to the contract.

thanks mjb. Thats what we were afraid of. Yes, the match is 100% vested. I take it the sponsor would need to get a letter from the participant allowing for the return from the contract.

I think there will be a problem in transferring the funds back to the employer since it would not be a a tax free transfer or rollover from the employee's account (another Q is what would be the event that allows a distribution from the contract?) It many be best to just not to do anything.

yeah but how does that affect non discrim testing? I know the IRS doesn't penalize for giving money away, but.....

[Lori H]

i just learned that the PLAN actually owns the contracts, not the participants. They reassigned the contracts to the plan when they got the new plan docs and the participants signed off on them. Seems to me the plan sponsor could just simply write a letter to the custodian and request that the match be returned to the company.

[Guest SuzieQNEC]

Interesting thread here & it appears there may not be a clear solution. Plan I'm working on puts the 100% vested match in the employee owned 403(b) accounts on a payroll basis, but if participant terminates before 1000 hours, participant didn't earn it. Employer wants to know how to get money back but plandoc doesn't discuss it. Not sure how to approach. Leave money in and include in acp test seems to be the best option for nhce discussed here but not sure. Also not sure if it is the hce. (one of each in plan in question)