Excess Deferral... or not

[Guest ccl]

Has anybody handled as situation like this:

An employee elected to defer $500 from their paycheck. The company deducted $1000 instead and contributed it to the plan. Eventually the mistake was discovered. The excess amount ($500) should be returned to the employee, with earnings. This technically is not an "excess deferral" but is it treated like one? Would the correction method be the excess deferral correction method from EPCRS?

Additionally, what if, instead of earnings on the amount, there were losses. What amount is distributed to the employee, the $500, or the $300 its now worth b/c of the losses the plan took?

Thanks in advance

CL

[Bill Presson]

Has anybody handled as situation like this:

An employee elected to defer $500 from their paycheck. The company deducted $1000 instead and contributed it to the plan. Eventually the mistake was discovered. The excess amount ($500) should be returned to the employee, with earnings. This technically is not an "excess deferral" but is it treated like one? Would the correction method be the excess deferral correction method from EPCRS?

Additionally, what if, instead of earnings on the amount, there were losses. What amount is distributed to the employee, the $500, or the $300 its now worth b/c of the losses the plan took?

Thanks in advance

CL

We have suggested (and have had the plan's attorney agree) to have the plan forfeit the extra $500 (or share equivalent) in the plan and have the employer make the employee whole outside of the plan.

[Jim Chad]

IMNTBHO I would treat it as an excess deferral because it exceeds the amount the employee authorized. I do believe it needs to come out adjusted for losses.

Also, I think the employer (or payroll company) should make the employee whole.

Honestly, I can't think of anything to back this up. It is just my gut feeling, for what its worth.

Good luck.

[BG5150]

My thoughts:

Would the $1,000 be higher than a plan-imposed limit? If not, leave it there and just do not withhold in one paycheck. It wouldn't be a "pre-funding" rule, because the participant would have received that much in the original paycheck anyway.

If the $1,000 was higher than a plan-imposed limit, the money can be removed from the participant's account (adjusted for earnings) and put in a suspense account, the person would be "made whole' (for the entire $500, no earnings). The money can be then used towards the ER's next deposit.

[Guest ccl]

My thoughts:

Would the $1,000 be higher than a plan-imposed limit? If not, leave it there and just do not withhold in one paycheck. It wouldn't be a "pre-funding" rule, because the participant would have received that much in the original paycheck anyway.

If the $1,000 was higher than a plan-imposed limit, the money can be removed from the participant's account (adjusted for earnings) and put in a suspense account, the person would be "made whole' (for the entire $500, no earnings). The money can be then used towards the ER's next deposit.

Thanks for the input everybody. Does anyone have any code section or regulation cites, or any guidance from the IRS that can be helpful?