Participant had deferrals taken in error

[Guest nynaeve]

A participant was deferring at 5%, and quit working for the employer.

He is rehired 3 years later, and somehow, the 5% starts right back up again.

He was rehired in 2007, and quit in August of 2008, and is now saying that he never wanted the deferrals, and wants the money back.

Is there any basis to return as a mistake in fact, since he never did actually elect to have these deferrals taken?

[Guest Sieve]

None. Not after a year of those deferrals without complaint! (It's like the guy who brings 2 bites of a hot dog back to the ballpark vendor complaining that the foot-long dog wasn't cooked right.) Compare: you only get 90 days under the new EACA rules.

[JanetM]

He is terminated EE he can take a distribution from the plan. He can get his money back just fine.

I agree with Larry, if they don't don't notice it on the first or second paycheck, they they are stuck with it.

[PLAN MAN]

I agree with Larry, if they don't don't notice it on the first or second paycheck, they they are stuck with it.

I'm hesitant to agree with broad statements like this. There may be circumstances or errors that would justify a correction and distribution to the employee. The plan administrator is responsible for operating the plan correctly and I don't think they can pass this responsibility on to the employee without proper justification. Just my thoughts

[Guest Sieve]

We certainly have discussed this issue before, where neither the software (nor a human) eliminated the deferral percentage at prior termination of employment so that it automatically reset at its prior level upon rehire: http://benefitslink.com/boards/index.php?s...ic=39123&hl

So, it's not really clear that the plan operated incorrectly in these cirumstances--it probably operated as the software mandated that it would, without appropriate oversight. From my perspective, a year seems like a long time to continue a mistake and still call it a mistake (although a few paychecks might still be a mistake), especially since a correction at this time has effectively shifted a bunch of income from 2007 into 2008 without the benefit of a deferral & distribution.

As Janet suggests, it would be more appropriate to process a termination distribution today (and, if necessary, the employer can make an additional 1099 or compensation payment post-termination to gross up for any early-distribution excise tax that might be due--although you'd first have to confirm that no rollover was made after the cash distribtuion (& I don't know how you do that other than wait until the income tax return is filed).). If that is not an acceptable approach--and for some it will not be--then I personally would reccomend that a client go through VCP (but if the first approach is unacceptable to the employer, then I think VCP would likewise be unacceptable). Just reversing the error, at this late date, just doesn't feel right to me.

[Bird]

The facts point to a conclusion that there is no error to be corrected: 1) his last election was for 5%, 2) 5% was withheld for a year or so with no complaints.

Obviously, he needs the money, and has figured out that if he can get it "back" (as a taxable wages) instead of "out" (as a distribution) he'll save the 10% premature distribution penalty (assuming he's under 59 1/2). And he may get it sooner if the plan has a delay for distributions. He's grasping at straws.