Ineligible Deferrals/Compensation

[Guest Retirement 91]

Assocaite received $50,000 in compensation in error. The associate is now being termed and the company is pursuing collections.

There were deferrals on this ineligible compensation. If the compensation is recovered, do we reverse the deferrals accordingly? What if the associate has distributed their account and there is no way to back out the deferrals? Is the plan at risk because there are ineligible deferrals in plan?

[austin3515]

If the person has no compensation, they are not eligible for defrrals so the deferrals should be forfeited. IF this is determined to be a mistake of fact, which it sounds like it is, it could actually be refunded to the company.

If this is corrected, the plan would not be at risk. You should have someone familiar with EPCRS (the IRS correction program) advise on dotting i's and crossing t's...

[Guest Retirement 91]

This associate is an HCE and has other comp that is 401(k) eligible. They have maxed out there deferral already at $16,500 for the year. Their annual deferral election is 8%. If we reverse the compensation and leave the deferrals, their rate will be more than their elected 8%.

We have beend advised not to touch the deferrals if the comp is not recovered. Would you agree?

[austin3515]

If it's not compensation, than you can't defer from it, and it is ineligible deferrals.

I'm not sure of the basis for allowing someone to defer from no compensation. Now, if they guy was paid a bonus and later you discovered he embezzled from the company so you want the bonus back, then it's a different story. But if you "forgot" to take him off payroll, or something like that, then it is not compensation, and the company should be legally entitled to get the money back from the Plan and from the individual.

[Guest Retirement 91]

Our issue is more like the embezzlement example you gave above. The associate received a bi-weekly bonus the company is trying to recover. At the time the bonus was paid the assocaite was eligible for the bonus. However, the associate is now being terminated and it has been determined by our business unit the associate was not eligible for the bonus because not all the criteria for the bonus were met. Our company is now trying to recover these funds.

With this in mind here are my options:

1. If the company does not recover the compensation, the pay record will be left as is and the deferrals will stand because the compensation was "earned".

2. The company recovers the compensation and corrects the earnings for this associate. In this case, do we reverse the deferrals associated with this compensation? If so, what do you do if the associate has already distributed their account?

How does your company handle these situations?