Employer over-withheld deferrals from employees' pay

[Guest A. Kintner]

I have a client that withheld too much from employees' paychecks. The employees' accounts now contain amounts in excess of their deferral elections for a given period. The EPCRS does not anticipate this, but my inclination is to self-correct by deducting the over-contributed deferrals from the accounts and return the amounts to the affected employees, with appropriate earnings (under the theory that the plan should be returnded to its condition prior to the failure). However, could the argument be made that these amounts are actually overpayments, which could be corrected under SCP as provided in Rev. Proc. 2006-27 (by placing the amounts in excess of the employees' deferral election in a suspense account established solely for this purpose, which would be used to reduce future contributions)? Any thoughts are appreciated.

[QDROphile]

EPCRS anticipates all sorts of errors, even ones you can't think of. That is why it provides the general guidance that you have used to formulate a correction. Your second thought for correction does not appear to me to be appropriate. If you do not have the specific circumstances for a specific correction method, don't try to force a correction that does not fit. If you can't tolerate any uncertainty, you will have to go with VCP. I looks like you are on track to use principles to formulate a reasonable correction. I suspect that some others would urge avoidance of distributions, but I don't think that is such a strong argument with elective deferrals.

[Jean]

If the individual is not catch-up eligibile, you may have a better self-correction approach by distributing as excess deferral. I have also seen cases where the excess (plus earrnings) is moved to a holding account, as you suggest. If the contribution is moved out of the individual's account and stays in the plan, the individual will need to receive an additional payroll payment equal to the excess deferral only (no earnings).

[KateSmithPA]

I have a similar situation. Participant told employer to quit taking deferrals from her pay as of 1/1/2008. They kept withholding and submitting the contributions. She spoke with the employer several times and now, after 3 months they have stopped. She wants her money back.

Can these funds be refunded to her as excess deferrals?

Thank you.

[Guest ggbrock]

I asked a similar question on this board but it was never answered. My thinking is that it should be distributed to the participant + earnings. The holding/suspension account correction procedure under the EPCRS would apply if it were employer monies (but not 401(k)). So if a match was also made, that amount + earnings would be placed in a suspension account which could then be used to reduce future forfeitures.