Mistake in fact or operational error

[Guest Ken C]

External payroll service stopped witholding participants deferrals when he reached the 15,500 limit for 2007. However internally the plan sponsor kept making deposits to the participants account over several payroll periods resulting in 22,000 in deferrals deposited. Recordkeeper will not allow a mistake-in-fact distribution of the excess because it happened more that once - in thier opinion that by definition makes it an operation failure.

Has anyone run across this situation and been able to do a mistake-in-fact distribution back to the plan sponsor. The record keepers only solution is to forfeit the excess amounts.

[Dan]

Some might do a refund to the employer but we don't. A screw-up is not a mistake of fact. Forfeiting it the conservative way to go. But its not like the participant loses any money. The employer makes the participant whole outside the plan and uses those forfeited monies to fund the next deferral contribution. It really should not be that much of a problem.

[JanetM]

You should ask the record keeper why they posted the excess amounts to the account? The amounts should have been rejected or generated an error report if they have even a have decent computer system.

[QDROphile]

Your recordkeeper is in no postion to call the shots. Record keepers either do what they are told or they resign, or they are fired. Dan has the best suggestion to avoid the confrontation and adverse economic effect.

[BG5150]

A screw-up is not a mistake of fact.

That's the way I was brought up.

[Guest Ken C]

Thanks all. Dan's solution of using forfeiture process is our fall back position. I just don't like the idea of the record keeper deciding what a mistake of fact is when the IRS has not defined what it is - only some examples of what they think it is not.

And unfortunately I'm not all that concerned with avoiding confrontation. The notion that once is a mistake in fact but twice is operational failure is not based on any logic I can see.

[QDROphile]

Don't get me wrong. You don't have a mistake of fact within the IRS view.

[ak2ary]

..and your cite that this is not a mistake of fact???

Its not an excess deferral to be forfeited because it was not deferred by the employee...the payroll company properly stopped the deferral at the 402(g) limit

The employer made contributions to the plan based on misinformation that the deferrals had continued..the employer, from what I read, thought that the contribution made was equal to the deferrals of the employees. The facts upon which the contribution was made were wrong

If not a mistake of fact then what is a mistake of fact?

[Guest LauraVanSteeter]

If not a mistake of fact then what is a mistake of fact?

A decimal error.

According the the IRS view, most plans will rarely have a mistake of fact. This would be an operational failure and should follow those corrective proceedures.

[ak2ary]

Which correction would that be...the suggestion made here is to forfeit the excess and "make it up to the employees outside the plan"

First of all, there's nothing to be made up, as the money never came out of the employees' pay.

Secondly, the solution is to then use the forfeiture account to pay for future deferrals which constitutes prefunding deferrals...illegal under the final regs.

You don't correct one operational defect with another.

Third while some of you may have run into individual auditors who disliked mistake of fact..the fact is , in this case, it appears to be the proper correction

Finally, regardless of the definition of mistake of fact you care to like..Ken's point that the recordkeeper saying "one is a mistake of fact and two is an operational defect" is silly, is directly on point. The recordkeeper should do as they are told by the trustee and / or administrator

[PLAN MAN]

First of all, there's nothing to be made up, as the money never came out of the employees' pay.

Can someone please explain the big picture to me? How did the plan sponsor keep making deposits if the external payroll service stopped withholding deferrals? Where did the funds come from for the plan sponsor to deposit?

Sounds to me like a bigger issue than just an excess. By its actions, did the plan sponsor deposit an employer non-elective contribution to the participant's account? If the money did not come from the participant's check what do you call it?

I agree, this is an administrative violation and calling it a mistake of fact won't fix it.

[Guest mjb]

If the funds did not come out of the employees pay there is notihing to return to the employee. Is this a recordkeeping glitch in that the RK continued to record deferrrals to the P's account even though no money was actaully contributed. Or did the employer contribute its own funds to the employee's account in the plan in advance of the witholding by the payroll service and now wants to be repaid the excess? Why isnt this a mistake of fact since if the employer was aware of the fact that the employee had maxed out on the deferral it would not have continued to remit contributions. But why isnt the trustee of the plan involved?

[Guest dbvail]

As I read it the employer has made non-elective contributions to this participants account. The document probably doesn't permit contributions to one participants account etc., so it is operational. The participant can't have it, but as there was no mistake in fact (contribs to ineligible etc) the employer can't get it back.

So why not put in suspense and use it up to cover any future contributions? Practical, if not clearly permitted by guidance.

Good luck.

[ak2ary]

Would your answer change if this plan did not permit employer nonelective contributions?

But I'll ask again...what does constitute a mistake of fact..if not this?

The fact that an occassional agent may have argued that mistakes of fact are rare..In this case where it would seem that the employer would be able to document that the excess contribution ties exactly to the proposed mistake and the employer deposited the money because he thought it was the amount deferred by the employee...it is a mistake of fact..and if not, why not?

[Guest dbvail]

Sure. Bad enough the accounts payable people kept submitting contibutions that were not as a result of payroll deferrals, but absent a place in the plan doc that allows employer deposits this gets to practicality, again.

Without guidance, we need to follow the doc (no help here in your scenario), or go to plan B.

I still feel that a contribution made on behalf of an employee that is made as a result of a mistake in fact can only result from including someone who is not eligible. Everything else is a screw-up. So how to fix? Once money is in the plan it can't revert. So put it in suspense and use it to cover the next deposit....even if that is salary deferral sourced. Unless it's over 2 tax years etc (ugly) it should come out in the wash.

But returning it to the employer is not my favorite option.

For what it's worth....

[Guest Ken C]

PLANMAN - Where the money came from? It came from a mistake by a clerk preparing a contribution roster for transmittal to the investment co. The clerk forgot to either remove the participant from the roster or change the participants contribution amount to zero to match the payroll report. When the roster was transmitted the investment co debit-ACH'd the sponsors checking account.

My puzzlement rests primarily with the recordkeeper who recognizes a "mistake in fact" and provides the forms for such a "distribution" but quantifies it as something that can only happen once.

If you accept the IRS position in PLR9144041 and suggestions that a "mistake in fact" be limited to typographical or arithmetic error then I would argue the above applies - a clerk failed to retype roster form entry to zero, and failed to verify roster totals matched payroll totals.

But thats just me.

[PLAN MAN]

I agree, under a common sense approach, this would seem to be a mistake in fact. However, I'm not sure the IRS would view it this way. According to the IRS, all the facts and circumstances of the situation must be considered before it can be determined to be a mistake in fact. I think the IRS could see this as an operational error because the system the employer set up to deposit employee deferrals does not work properly. As you pointed out, the amounts deposited do not necessarily correspond to the salary deferrals withheld from participants' paychecks. What funds are sitting in the checking account? Were salary deferrals from other participants deposited into this participant's account? Is this employer money deposited - which can only go in as an employer contribution.

The system does not have a check to stop deferrals over the statutory limit. But, this is not a simple case of excess deferrals. Will the employer be making any matching or profit sharing contributions? The IRS does not make it easy for the employer to receive money back from the plan.

[austin3515]

Clearly, no one posting to this works with small employers. These things happen ALL THE TIME!!! Maybe not at Microsoft or IBM, but John Doe DMD often makes this mistake.

Just fix it move on!!! If I spent this much time thinking about how to correct these things I would not get nothing done. If it was me, I would short future 401k deposits for the employee. If there are any employer contributions, I'll transfer from 401(k) source to profit sharing/match source for that employee.

I agree the money shouldn't go back to the employer--remember, it's right in 401(a) that it should be "impossible for money to back to the employer." Why bother potentially running afoul of this requirement?

It's important to remember that IRS agents work for the government, and not in the "real world."

[Guest mjb]

Can someone provide a citation to what the IRS considers to be a "mistake of fact" or operational error instead of speculating on what the difference is. As I recollect the only example of a mistake in fact defined in ERISA is a mathematical error which is not the only mistake of fact which can occur.