Contribution error

[Guest fidelityrose]

Payroll sends contribution file to 401k service provider and then the provider does an ACH to take the money out of sponsor's bank account to fund the contribution. Unfortunately the 401k service provider doubled the contribution amount so the ACH was for more than the amounts listed on contribution file.

Contributions were employee deferrals plus match. The amount that was withheld from employee paychecks is correct. The error is just that the amount funded in plan is double.

This error involved all participants who had contributions for this payroll. The total amount that was over funded is $2,800. This is a small plan with 21 employees currently contributing.

We haven't had this happen before and I would like suggestions regarding appropriate correction alternatives.

1. Do we reverse the trades and remove the amount of overfunded contribution plus any earnings from employee deferral and match sources and place in error correction or forfeiture account? Assuming document permits. If reversal of trades produces a loss then what?

2. Do we take no action and just leave the extra funds in participant accounts and adjust with next contribution? If we do this does this create an issue with prefunding deferrals and match contributions before the money is actually withheld from paychecks?

3. One thought was for the trades to be reversed and overfunded amount plus earnings to be returned to employer but I'm concerned about ERISA rules regarding reversion of assets to employer and plan assets to be managed for exclusive benefit of participants.

Proposal 2 would seem the easiest and since this is a mistake I'm thinking this wouldn't be considered prefunding of contributions.

Thank you for any suggestions you can provice.

[K2retire]

Duplicate deposits of a contribution is one of the few examples that the IRS gives of a Mistake of Fact that can be refunded to the employer.

[Guest fidelityrose]

Duplicate deposits of a contribution is one of the few examples that the IRS gives of a Mistake of Fact that can be refunded to the employer.

Thanks for your response. I really appreciate your help.

[Spencer]

I have this exact situation with a client that has over 200 ees. Financial instituion has advised them that if they reverse the contrbutions and submit a corrected deposit, there will be a prohibited transaction due to late deferral deposit. The error was made by the payroll company. Client is in the process of switching from weekly to bi-weekly pay periods. The error was for pay period ending 05/28 and the correction will be done this week. Any thoughts?