Refunding pre-funded contributions

[Bird]

I've always maintained that once an employer contribution is made to a plan, it should stay there, whether that means reallocating monies to other participants' accounts, or increasing contributions to others within a self-directed environment, or allocating contributions that an employer really didn't want to make in a pooled environment.

I know that the payroll companies that have jumped into this market with both feet have no qualms about "refunding" money that wasn't really meant to be in an account, be it PS, match, or whatever, and I guess I am just curious if that's become some kind of norm while I missed a memo or whatever. I have a couple of plans where that would really be a lot easier, and I'm ready to tell them that's too bad, but thought I'd check.

[K2retire]

I've seen not only payroll companies, but other TPAs take that position. But I still haven't seen any change in the IRS position.

[Jim Norman]

Payroll companies will do whatever the client tells them. If the client asks them if they can return the money, they will say yes because they are only answering the question as to whether or not their system can return the funds, not whether or not it is permissible under the Code.

To quote from one payroll company's exit form, which must be initialed by the client before they release plan funds, "I acknowledge that XXXXXXXXXX assumes no responsibility for the Plan's compliance with the requirements for tax qualified status of the Plan under the Internal Revenue Code or ERISA."

[PLAN MAN]

I've always operated under the rule once the $ is in the plan it must stay there unless the IRS determines the contribution cannot be deducted by the plan sponsor. A former TPA with owner-only and really small plans, allowed the plan sponsor to request a return of any amount over the maximum deductible amount for the year. If the plan sponsor or CPA miscalulated, they got the money back. I never agreed with this approach.

[J Simmons]

check this thread and this one

[Bird]

Thanks for the feedback. I will continue to do it the right way.