Correction of Contributions

[Guest rocnrols2]

Plan X is a 401(k) plan that provides a matching contribution. Assume the following two situations:

Employee A works for the sponsor of X, makes elective deferrals and has those deferrals matched under the matching formula. A terminates on 12/15. X's recordkeeper doesn't learn of this until 1/15. Assuming there was a two-week period delay in paychecks, A is paid on 12/31 and has elective deferrals deducted and matches taken. What can X's sponsor do to correct the over-contribution?

Employee B works for X's sponsor. makes elective deferrals and has those deferrals matched under the matching formula. B is a salesperson earning commissions. Assume B makes a big sale to a customer and the customer cancels the sale 30 days later. In the meantime, B has earned the commission and had elective deferrals taken and matching contributions made. Assume alternatively that B continues to work for X's sponsor or that B terminates employment before the customer cancels the sale and takes a lump sum distribution from X. What can X's sponsor do to correct the over contribution?

[J. Bringhurst]

Since the employee was paid for services actually rendered (as opposed to some kind of severance payment), I don't know that there was an overpayment for Employee A with regard to his elective deferrals. If the plan provides for matching contributions to be made per payroll, I don't know that there is a problem here either.

As for Employee B, you say that he was actually paid on the commissions, even though the sale was cancelled later? What happens to the cancelled sale...will future commissions be offset? Wouldn't this just come out in the wash later? If the plan provides for deferrals on commisions and commissions are actually paid, then the deferrals should be taken, yes?

If there really is an overcontribution, the deferrals should be paid out to the participant and any associated match should be forfeited. To the extent a participant has terminated and taken these overcontributions, the participant should be contacted and informed that such amounts were not eligible for rollover. Some employers attempt to recover the match, but are pretty much aware that they'll never see it again.

[Guest rocnrols2]

Thanks for your reply. As to Employee A, what if, instead, A worked in a distant office and the fact that s/he had terminated employment had not been communicated, but A still received compensation payments, had deferrals taken out each paycheck and matching contributions were allocated on these deferals?

As for B, I generally agree with your answer but I am a little troubled by the facts that the deferrals are vested, there is no provision in the Code permitting the distribution (remember the 402(k) distribution restrictions) and the anti-alienation requirements. Would it make a difference if the plan were to be amended to say that compensation must be both DULY EARNED as well as paid and to specifically provide for a distribution/forfeiture? There is also a possibilitiy that the IRS could take the position that absent a mistake of fact (whatever that means) the amount cannot be distributed. Thus, which would be better: offsetting future deferrals/matches by the excess deferral/match or distributing deferrals and forfeiting matches?