Can Plan Correct Overallocation of Contributions to Participant's Account?

[Guest rocnrols2]

Company X maintains a 401(k) plan for its employees. Assume the following scenarios.

Assume employee A is a commissioned salesperson and sells a product to a customer for which s/he would be entitled to a commission. Customer has 30-day period in which to cancel sale. Assume customer cancels sale. A has had 401(k) and matching contributions allocated to account based on commission based on sale of product which was later cancelled by customer. Can the plan forfeit the match and 401(k) contribution based on the cancelled sale?

Assume Employee B is a commissioned salesperson and sells a product for fraudulent reasons. B earns a commission for which X allocates a 401(k) contributions and matching contribution to B's account under its 401(k) plan. Internal investigation reveals B's fraud. Can the plan forfeit the match and 401(k) contribution based on the fraudulent circumstances of the sale?

Assume Employee C is a salaried employee and elects to make a 401(k) contribution of 6% of compensation. Due to an administrative error, the plan erroneously credits contribution of 8% of compensation even though only 6% contribution reduced from C's pay. Can the plan forfeit the excess 401(k) contribution?

Assume Employee D is a commissioned employee and sells a product to a corporation. D earns a commission for which X allocates a 401(k) and matching contribution to D's account under X's 401(k) plan. An internal investigation later reveals that the circumstances of the sale suggest that the buyer of the product intended to use it for purposes of money laundering. A further investigation reveals that one of the directors of the corporation is an al-Quaeda operative identified by Homeland Security as a major terrorist. Can the plan forfeit D's 401(k) contribution and matching contribution based on the improper sale?

In each of the above circumstances, is it implied that compensation means that which was properly earned? If an error occurs can the error be corrected by a payroll reversal? Or is a plan amendment necessary to take such corrective action? EPCRS talks about overpayments which are payments in excess of the amount the participant is entitled to. But can a plan take a preeptive approach to prevent overpayments on or after the time when contributions are allocated?

[QDROphile]

A plan can always correct mistaken contributions and allocations. The optimal and acceptable corrections vary with the circumstances. Most of the circumstances you describe involve issues in addition to mistakes in the contribution and allocation amount. If you really have these circumstances to deal with, you need legal counsel.

For example, in the first situation, is the commission earned? If the commission amount is not earned because somehow the commission is retrieved if the customer cancels in 30 days, why is it paid before 30 days? How is it retrieved? Is it offset against future commissions as though it were an advance? What is the commision agreement? Are there any state law mandates that affect treatment as compensation?

[Guest rocnrols2]

Thank your for your observations. One other area of concern is whether this would violate the antialienation requirement for qualification. As you are likely aware, [/i]Guidry provided that an employer could not recover from the plan for ill-gotten gains. But, what if it stays in the plan through forfeiture or reduction of future earnings? Also would this violate the vesting requirements because there is no exception for this type of thing in Section 411(a)? I am now less concerned about antialienation but more concerned with the vesting issue.

[QDROphile]

See the first sentence in my first response. Your other concerns relate to the question about whether or not the contributions are mistaken. That is why one of my example questions was whether or not the commissions were compensation even if the customer cancelled. If the commissions were compensation, then the contributions relating to the compensation were not mistaken. Also, "forfeiture" is not the best term to decribe corrections generally, although some corrections may involve forfeiture.