EMPLOYEE DEFERRALS SENT TWICE

[Guest MKELLY9522]

we have an employer who sent the biweekly employee deductions twice.

And they were traded/allocated to participant accounts twice...

SO, somebody who deferred $50 for the week ending october 3rd, actually received $100 contribution for that payroll

How do we fix this? If we reverse the trades, b/c of the fall in stock market, the employer will have to make up the difference. For example, if the total payroll for that week ending was $20,000, if we reverse the trades, we may only get $10,000 back.

Can we use this over conribution as a credit towards the next paryoll deduction? So if that same person who had $50 deducted for the week ending 10/3, but received $100 in his account, has $75 deducted from his pay for the week ending 10/10, the employer sends in only $25. The end result will be the same...the employee will have $125 contributed to his account for those 2 weeks.

Is it okay to handle it this way?

[QDROphile]

EPCRS says you can't correct a mistake by another erroneous transaction.

[GBurns]

You want to ignore the salary deduction election agreement, then you want to "cook" the payroll YTD figures. Then you want to keep some of what was deducted from the employee on the payroll.

What else will you think of next ? Isn't the hole deep enough already ?

[rcline46]

I think Q and Gburns missed the boat. It was NOT deducted twice, it was SENT twice. The employee is unaffected, only to Co. bank account.

Now next payroll comes around. Some defer the same, some more, some less. How do you reconcile?

A. Liquidate the shares purchased with the extra payroll deposit, co. takes the hit.

B. For those who are same or deferred more - don't deposit - employee gets loss due to timing. (Those who deferred less, carry forward some more).

I think the correct way is to liquidate and co. takes a loss.

[GBurns]

No, we did not miss the boat.

I was responding to the thought of correcting by changing the next salary deferral as posited by the OP in paragraph 3.

Are you suggesting in B that the employer keep the employee deferral ?

[QDROphile]

If you perform the correction properly and all you are doing is using left over excess funds as a credit against the next contribution, that is OK, and is usually preferred to retrieval of funds by the employer. Part of the proper correction involves the investment return. You cannot give a participant any credit for the early deposit, you have to calculate as though money was never in the account the account, not left in the acocunt.

[Guest MKELLY9522]

If you perform the correction properly and all you are doing is using left over excess funds as a credit against the next contribution, that is OK, and is usually preferred to retrieval of funds by the employer. Part of the proper correction involves the investment return. You cannot give a participant any credit for the early deposit, you have to calculate as though money was never in the account the account, not left in the acocunt.

If at the end of two week cycle, each employee ends up having in there account the amount of the deferral that was withheld from their pay, what wrong has been done?

If we reverse the second wire sent, the employer will have a significant loss, considering how far the stock market has fallen.

So far, the employer has only withheld from the participants once, but sent money twice.

I can't find any think that addresses this type of situation and how to correct...can anyone point me in the right direction?

[ERISAnut]

If not doing it GBurns way, which I would arguably support then the only other alternative would be the make the employee account whole after a series of transactions.

First, you correct for the amounts added to your recordkeeping system. This will be a dollar based transaction that moves one of the payments from the deferral source of funds.

This will, of course, oversell in funds due to the market being down.

However, when you calculate the difference between the funds that are actually sold to generate the $50 and the number of units that were originally purchased with the erroneous $50 deposit. That difference of units must be repurchased within the participants account. The resulting cash after those funds are used to purchased the units to make the participant's account whole will be either returned to the employer or offset the following payroll.

The issue doing it this way (which certainly would make the participant's account whole), would be that $50 isn't being refunded to the employer. The tax reporting must be consistent.

[Kevin C]

You can't use the excess towards the next pay period's deferrals. 1.401(k)-1(a)(3)(iii)© prohibits prefunding of deferrals. There is a corresponding rule for matching contributions.

[Bill Presson]

I gotta say, y'all crack me up. Either you don't actually do recordkeeping in the real world or you are perfect and have perfect clients.

The prefunding cite is to keep people from depositing deferrals before an election is made and/or to prevent a deposit to accelerate a deduction. None of which is the case here.

All to proposed solutions involve hours and hours of time with 0 benefit to the client or the participant. And I'm not saying that the proposed solutions aren't precisely, exactly correct.

I just know that in our shop, we would most likely do exactly what MKELLY9522 proposes to do and offset the next deposit. It's almost dead on to the spirit of EPCRS by putting the plan back to where it would have been absent the error.

If an employer asked what was available to correct the issue, we could lay out all the alternatives and this is what they would pick. I would be happy to discuss the issue with an IRS or DOL auditor.

[Bird]

I gotta say, y'all crack me up. Either you don't actually do recordkeeping in the real world or you are perfect and have perfect clients.

Amen. Adjust future deposits and move on.

[Kevin C]

Bill, that reg section has more in it than you are saying. I don't like the rules either, but they are what they are. Prior to 2006, we would have corrected by applying the excess to the next deposit. The rules are different now.

© Contribution may not precede services

(1) General rule. --Contributions are made pursuant to a cash or deferred election only if the contributions are made after the employee's performance of service with respect to which the contributions are made (or when the cash or other taxable benefit would be currently available, if earlier).

(2) Exception for bona fide administrative considerations. --The timing of contributions will not be treated as failing to satisfy the requirements of this paragraph (a)(3)(iii)© merely because contributions for a pay period are occasionally made before the services with respect to that pay period are performed, provided the contributions are made early in order to accommodate bona fide administrative considerations (for example, the temporary absence of the bookkeeper with responsibility to transmit contributions to the plan) and are not paid early with a principal purpose of accelerating deductions.

I wasn't aware that EPCRS applied to "Oops, I put more money in the plan than I wish I had" situations.

One thing I haven't seen addressed is whether there are any employer contributions under the plan that this deposit could be used towards. Do they fund the match each pay period? quarterly? annually? What about profit sharing? Safe harbor non-elective?

[DMcGovern]

The extra contributions were not employee deferrals (or match, if this is a part of the allocations). The excess was an employer contribution that was allocated improperly.

The correction is to put the plan back into the position as if the error had not occurred.

One possible method of correction is to calculate what the ER allocation to the participants would be according to the Plan document. Then contribute and allocate that amount.

Alternative method would be to forfeit the excess contributions and use the forfeitures as specified in the plan document.

Hopefully, no participants took a distribution that would have included this excess contribution?

[GBurns]

Bill

There is much more than recordkeeping involved.

[ERISAnut]

Let's all keep in mind that the error was a premature deposit of $50; which will self correct in the next cycle by merely withholding the amount from the employee's pay, but not funding an additional deposit.

It is also important to keep in mind that this is one instance involving one employee. Had this been a payroll file with 10,000 employees, but the error happenend to 100 of them in relatively small amounts, you are looking at an event that will perfectly align itself on the next payroll.

I do not think there is a huge issue given the relative insignificance compared to the number of errors over the number of transactions. I do think that we can get too analytical when the fact is that the participant involved may have lost funds due to the daily valuation of the early deposit. At some point, that becomes a hind-sight 20/20 issue; where the participant lost due to an oversight, but the loss is only ascertainable in hind-sight. The process remains, inherently, in tact with the offset of the following payroll.

But, there is a decision that the employer must make when determining whether to pony up the resources to provide a full correction. I think the IRS (and know the DOL) has looked the other way on issues that were slightly more eggregious than this.

But, I do agree that rules are rules and they are there for a reason. If not to be followed, then why?

[GBurns]

That was only the example. We do not know how many employess or how much money was involved.. All we know is:

"we have an employer who sent the biweekly employee deductions twice.

And they were traded/allocated to participant accounts twice..."

So we know that there was more than 1 participant.

Plus:

"For example, if the total payroll for that week ending was $20,000, if we reverse the trades, we may only get $10,000 back."

So we know that more than $50 is at stake.

[Guest ggbrock]

Why wouldn't this simpliy be treated as a mistake of fact? ER contributed too much to the plan; they now need to move the excess $50 to the forfeitures account, with earnings, and use it however the plan document says to use it. Am I missing something essential here?

[DMcGovern]

Ok, I'm going to try one more time on this one. The funds that were sent for investment were 1) the regular employee deferrals; plus, 2) an employer contribution that was probably not allocated per the plan document. The additional amounts deposited were from Employer dollars. It would be wrong to treat these funds as employee deferrals and try to "self-correct" through the next deposit.