Too Much Match -- Mistake in Fact?

[Guest CMC]

Earlier this year, Seller's 401(k) plan was terminated prior to the closing of a stock deal. Seller incorrectly calculated the match made on final elective deferrals b/c it failed to pro-rate the comp limit for the short year. Consequently, a handful of participants each got several thousand dollars too much match. Most of these accounts have been rolled over -- some to Buyer's plan. EPCRS says Seller should send a letter to participants letting them know the extra match was not an eligible rollover distribution. Questions are as follows:

(1) To whom should participants be instructed to send the money? Seller's terminated plan has no need/use for it -- the trust is in the process of being zeroed out. Has there been a mistake in fact here such that participants could be instructed to send the money back to Seller (which is now a sub of Buyer)?

(2) Buyer's plan now holds some of the extra match in rollover accounts. Does Buyer have the authority to unilaterally reverse these amounts out of these accounts (like Seller could have if the $ were still in Seller's plan)? If so, what should Buyer do with the money? Put it in an unallocated account in its own plan and use it to pay expenses and reduce contributions? Send it to Seller (now its sub) under the mistake-in-fact theory above?

[Guest CMC]

No takers, eh?

What if, instead of trying to get the extra match back, we simply treated it like an "Excess Amount" and followed the procedures under EPCRS Section 6.06(1)? Specifically, we'd let participants know that their distributions included the extra match, that the extra match is not eligible for favorable tax treatment (including rollover) and then we'd issue 1099-Rs. Seems much simpler.

[rcline46]

call it profit sharing under -11(g) amendment and pass general testing?

[Guest CMC]

Many thanks for this. A couple things would seem to make that unattractive here:

(1) The plan has been terminated and the trust zeroed out, so solutions that involve plan amendments and additional contributions are necessarily more difficult than those than don't.

(2) The cost. The extra match that went to these 6 participants amounts to 20% of eligible comp for some of them. An additional contribution of that size for everyone else would be prohibitively expensive.

I've read EPCRS 6.06 about 20 times now. It seems like w/the release of Rev Rul 2008-50, which expands the definitions of "Excess Amount" and "Overpayment" and, for the first time I think, sets out different correction methodologies for the two, there may now be two ways to correct a contribution that exceeds the plan's own limit -- under 6.06(1) or under 6.06(3). Under (1), you'd send the notice and issue the 1099-R. Under (3), you'd send the notice, take reasonable steps to try and get the money back and suspend it in the plan for future use to the extent you are successful.

Were our plan still up and running, we'd try for (3), since that keeps (or attempts to keep) the money in the plan and lets us realize some future benefit with respect to it.

Because we have no plan and no trust, however, (1) seems like it is more expedient. Participants get to keep the money (albeit not in a qualified plan environment) but we can close this out with minimal extra hassle/expense.