Overpaid Matching Contributions

[Miner88]

Our 401(k) plan document does not allow for matching contributions on catch-up contributions. However, HR has been matching catch-up contributions for 3 years and just discovered the error. To correct the error, we are going to take the overpayment out of participant's accounts (along with earnings). Do we need the participant's consent to do this?

[QDROphile]

No participant consent to a correction. The IRS does not need participant consent to disqualify the plan.

Would you mind explaining how catch up contributions get matched? Under most match terms, it is mathematically impossible to match catch up contributions except when the ADP test is the limiting factor. And if the ADP test is the limiting factor, one would think that catch up contributions would be matched.

[Miner88]

It is a discretionary match determined each year by the Board. The way the resolution was written was that the match is made "in the amount of 2% of the Deferral Contributions made by each Participant." HR looked at both elective deferrals and catch-up contributions to determine the amount that was 2% and sent that amount over to the TPA as the match amount.

[rcline46]

I would have to see some numbers, but I cannot figure out how a match of 100% to 2% could ever possibly include a catch-up contributon unless it were specified to be calculated on a per pay basis.

[masteff]

rcline, I started to agree w/ you but then re-read what Miner wrote... "2% of the Deferral Contributions made", not of eligible income.

Miner, I assume since you capitalized Deferral Contributions that it's a defined term in your plan and that you've specifically review the plan and confirmed that catchup is separate and distinct from Deferral Contributions.

I'm thinking you'll need to correct under EPCRS. Anyone else have a thought on the type of correction?

[Miner88]

Thanks for all of your replies. Yes, Deferral Contribution is a defined term in the plan and it does not include catch up. I was planning on correcting the error as a self correction of an operational error under EPCRS - the overpayment will be taken from the participant's account with earnings (calculated based on the lowest earnings rate for the period for the menu of funds available). Someone in HR suggested that we would need the participant's consent to take money out of their accounts, and, although I didn't agree, I wasn't 100% sure.

[rcline46]

I would still like to see some numbers (or document language). A match of 2% of Deferral Contributions means like a nothing match! Suppose an employee defers 5% of pay. .05 times .02 gives a match of .001. If the employee makes $30,000, this translates to a match of $30!

Second, unless there are some peculiar deferral limits in the document, catchup contributions are not determined until either (a) the 402(g) limit is exceeded during the year, or (b) the year is over. Catchups are NOT determined on a per pay basis. Payroll systems may have a regular and a catchup field identified, but that is a payroll issue and not an ERISA catchup issue.