mistake of fact

[Belgarath]

Funny how often this comes up. Let me start by saying that yes, I have read PLR 9144041, RR 91-4, 90-49, and Notice 89-52.

We've had a lively discussion on the following situation. Takeover plan, calendar year valuation, plan, and fiscal year. Defined benefit, with annuities as part of the funding, along with mutual funds, etc., etc..

Apparently what happened is this - and I don't even have firm #'s, so I'll use hypothetical. And I'm not concerned with the wisdom of their investment choices, only the situation at hand.

Required plan cost for 2003 was, say, $200,000. Due to their recently unfavorable investment experience in mutual funds, they decided to put the whole $200,000 into annuity policies.

The insurance company practice evidently is to send a bill each year, based upon the contribution to the annuities for the prior year. So they send a bill to the plan sponsor in December of 2004, saying there is $200,000 due for the annuities. (Now, of course, being flexible annuities, the sponsor is under no obligation to pay.) However, the receive the bill, so they pay it in early January of 2005.

Later in February of 2005, the actuarial valuation is performed. Required funding is some amount less than $200,000.

We're now looking at this on a takeover request. Can the excess be withdrawn as a mistake of fact? Certainly, the safest solution is to not do this, and leave excess in plan for 2005 contribution. However, sponsor doesn't want to do this.

This seems a little tricky. I lean toward conservatism, and thus am not comfortable with this being a mistake of fact. On the other hand, if the billing should have been $200,000, and the insurance company had a systems error and billed $300,000 instead, which the employer paid, then I'd think this would be a strong argument for a mistake of fact, so I'm not so sure how the first situation is really all that different. Anybody ever encountered something like this, and how did you handle? Or, how comfortable would you be with considering this a mistake of fact? Thanks.

[WDIK]

Certainly, the safest solution is to not do this, and leave excess in plan for 2005 contribution.

I agree with this statement. It seems to be an easy out for a situation where reasonable people might come to differing conclusions.

It is also my opinion (which has no legal authority whatsoever), this should not be considered a mistake in fact since:

1) There appears to be no system error, misplaced decimal point or other such error.

2) In this situation, the insurance company is not in the position of determining or mandating the allowable contribution. Although I can certainly see why there could be confusion in this case, the mistake was the employer not understanding proper procedures for the plan.

[Bird]

I don't think it's a mistake in fact either.

What we really need is a correction for a "mistake in stupidity." (I have clients like that too - imagine getting a "bill" for $200,000 and paying it, without question.)

[four01kman]

I seem to recall a line of IRS letter rulings about "mistake in fact" and "mistake in law" about 10 or 15 years ago. I don't think the situation you outline would fit either. There isn't a mistake in fact, because the fact causing the contribution -- the insurance company bill -- wasn't incorrect.

[rcline46]

Why worry about minimum cost? What do you get with a maximum cost?

You also have the procedure for getting $ back under the quarterly contribution ruling? Never used it so you might have alread covered it.

[david rigby]

Hold on. What does the plan say? Is the $200K deductible? Any provision that requires a contribution to be deductible in order for it to be deemed a "contribution"?

Second, Belgarath, I would appreciate you e-mailing me the address of this plan sponsor so I can send him an invoice.

[Belgarath]

The amount that isn't deductible for 2004 will be deductible for 2005. And since paid in 2005, no excise tax issues.

Pax - you'd be surprised (or maybe you wouldn't) at how many clients just pay any bill they receive. Except our bills for services, of course.

I once had a client make out a check to me personally for the plan contribution of 124,000. That will open your eyes when you haven't had the morning coffee yet!