Use of Erroneous Contribution

[Guest Phil L]

An employer has made an error in calculating and contributing to the profit sharing accounts of some participants in the 401(k) plan. The plan clearly states in the contribution/allocation formula that no amount shall be contributed in excess of the 415 limits. However, the employer was unaware of what the 415 limits were for these individuals and made the contributions to each participant's account. Upon performing the 415 test, the improper contributions were discovered and pulled out of the participants' accounts. The employer subsequently used these amounts as an offset to the next pay periods salary deferral and matching contributions. A spirited discussion has developed regarding the treatment of these erroneous contributions. Any imput or comments as to the various positions taken would be greatly appreciated.

Here are some of the positions taken so far:

1. The contributions in excess of the 415 limits are excess annual additions and have to be treated as such under the correction method stated in the plan document. The document doesn't say that salary deferrals will be refunded. It says that the excess annual additions will be used to offset future employer contributions to the plan. The person advancing this position claims that the use of such amounts to offset salary deferrals is a prohibited transaction since the offset amount exceeded the total amount of matching contributions that were submitted (ie, this was an improper loan to the employer).

Any thoughts on this matter?

2. The erroneous contributions are NOT excess annual additions because the plan's contribuiton/allocation provision specifically prohibits a contribution in excess of such amounts. Therefore, any contribution over the 415 limit for an individual is a contribution in error that must be corrected (but it isn't an excess annual addition). The money pulled out of participants' accounts in this regard can be used for any legitimate plan purpose, including the payment of salary deferrals, since this is a pre-funded unallocated employer contribution.

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[Guest klc]

I would agree with thought #2, however cannot cite the legal basis to confirm.