Discretionary contribution made for an employee that never met the eligibility requirements.

[Guest Moe Howard2]

Three years ago, the employer made a discretionary PSP contribution for an employee who had never satisfied the eligibility requirement.

The requirement is one-year service & 1000 hours.

The employee worked only 8 months and then quit. However, the employer made a 15% contribution for the employee ($ 16,000 x 15% = $2,400).

Like I said, that was three years ago. The balance in this erroneous participant's investment account is now $ 3,200. He has moved out of state and the employer has no address for him.

The employer wants to terminate the plan, but has no idea what to do with the $3200. Is the former employee entitled to the $ 3,200 ? Since he was never a participant in the first place.... can the $3200 be refunded to the employer?

Was the $2400 erroneous contribution a "mistake of fact contribution (excess contribution" or some other type of operational failure ?

How can it be corrected now ?

[pmacduff]

no vesting schedule? With 8 months of service, I would think that the "participant" whether legal or not, on a 2/20 schedule would be 0% vested....???

[Guest Moe Howard2]

pm: when a plan terminates, all participants are automatically 100% vested. That's a standard IRS & ERISA rule.

My questions are .... Is the former employee entitled to the account ? and Was the employer's error an excess contribution error or was it an operational failure ?

I'm thinking that the former employee is entitled to nothing, because he never met the eligibility requirements.

[pmacduff]

so sorry - guilty of not reading your entire thread thoroughly!!! (I know 100% vesting on termination!) I would agree that the former employee is entitled to nothing. We had a plan termination where the account in question was forfeited and used to pay fees (per the plan doc) with the remaining reallocated to everyone else before liquidation & distribution. I don't know if that is the correct procedure, but we/the client never received any "backlash" for doing it this way and it seemed more acceptable than returning $ to the Employer...

[david rigby]

Slow down a bit. Just because the employer "wants to terminate the plan" does not give anyone 100% vesting. (Agreed, it may not be relevant to the original question.)

But why did the ER make any contribution to the plan for an employee who was not a participant? Was it deducted? Perhaps IRC 404 was violated?

"...can the $3200 be refunded to the employer?" Be very careful about this. What does the plan say?

[Guest Moe Howard2]

pax, do you really think the plan is going to address this rare unusual error situation ?

[WDIK]

Two of the prototype documents that I work with contain language similar to the following:

INCLUSION OF INELIGIBLE EMPLOYEE: If any person who should not have been included as a Participant is erroneously included in any Plan Year and discovery of that incorrect inclusion is not made until after a contribution for that Plan Year has been allocated, and such ineligible Employee has not received a distribution of the amount erroneously allocated to him or her, then the amount erroneously contributed with respect to the ineligible Employee cannot be refunded to the Employer and will be applied as a Forfeiture for the Plan Year in which the error is discovered.

[Blinky the 3-eyed Fish]

WDIK, you sound like an...

Pmacuff, you probably got the vesting right the first time. Most documents have 0% cash-out provisions so that when a person who is 0% vested terminates, their balance is forfeited. Of course I could be full of...

(Memory like an elephant)

BTW, the VS doc we use has the same language.

[Guest Moe Howard2]

WDIK: I'll check the plan document.

Actually, the plan has been dormant for a couple of years. All former participants withdrew their 100% vested accounts two years ago. The only asset that the plan still holds is the $3200 investment acount of the erroneous participant.

So if the $3200 is forfeited in year 2005 and the plan terminates in 2005 ..... who gets the $3200 forfeiture? The plan has no participants to give it to.