Match contribution as a mistake of fact

[Jean]

A calendar year plan is established in 1998. The employee deferral and match are made every payroll and are programmed where the percentages are entered by a user.

In October a key employee reaches his $10k limit and the user sets his deferral % to 0. However, the user failed to stop the match and an additional $4000 was contributed to the employees account. The error was discovered in 1999 and the $4000 was returned to the employer as an administrative error.

The question is, should the money have been returned because the error was discovered in 1999? If it was not returned as an administrative error, the ACP and top heavy would have failed. ACP would have required a 1.5% QNEC and top heavy would have been 2.75%.

It is the opinion of the administrator that this was a mistake of fact, and was handled correctly because it was returned prior to the March 15 deadline.

Any thoughts?

[Disco Stu]

IMHO this was handled in almost the right fashion, but not quite.

Instead of sending the money back to the employer, I believe the better way to handle the error is to keep the money in the trust and just have the employer reduce their next contribution to the plan. It doesn't look like a reversion of plan assets that way. Hanging your hat on mistake of fact is always risky.

There's really nothing at this point that you can do to put the cat back in the bag. But...your administrator is off base by stating that everything is OK cuz the money was returned by March 15. This doesn't have anything to do with ADP/ACP testing.

Regardless of the circumstances, the mistaken contribution should not have included in the ACP test. The plan didn't allow for the contribution, so you shouldn't test it.

In addition to this, many plans have language about how to handle mistaken contributions...you might take a look-see there.

[Jean]

Would I need to include the $4000 in the top-heavy test?