Contribution deposited, now ER doesn't want to allocate

[Guest Boilerburm]

An employer put in money each pay period to a discretionary profit sharing plan (single pooled account) at a rate of pay (say 4%) for all. Now, after PYE, he is told that some of the ees are not eligible. He still wants to allocate the 4% to the eligible employees. He could allocate everything deposited, but he doesn't want to. He would rather take it back or carry forward to fund next year's 4% contribution. Can he get the money out? Since this is not a true excess contribution, I can't find guidance on whether he can back it out, or what his options are. Any help?

[BeckyMiller]

Well - you can try the old mistake of fact concept. If the plan allows for the return of a deposit made on account of mistake of fact your sponsor can take the funds out.

BUT, caution is advised here. The IRS is very fussy about what is a mistake of fact. Their public comments exclude things like carelessness, inattention to plan terms, etc. They are looking at things like someone misleading you on their age. Personally, I think the rule should be more flexible than what is implied by the IRS's public comments, but....who knows.

See ERISA Section 403©(2)(A)(i) and Martin v. Hamil, CA-7, 608 F2d 725, Rev. Rul. 91-4, etc.

[Kirk Maldonado]

BeckyMiller is right. In order to get a refund, it has to be something like you thought the check was to pay the rent. This mistake would not permit a refund.

Also, you cannot hold the amounts in a suspense account for allocation next year. You can't have a suspense account except for Section 415 violations.

[Guest Boilerburm]

ok Kirk, so your telling me what I already thought - I can't return it as a mistake in fact, and I can't keep it for next year. What can I do with it?!?!

[Larry M]

Okay, so employer contributed, say, 5% to eligible employees instead of the 4% he (or she) intended to contribute.

and, for whatever reason, he does not want to allocate the extra 1% to them this year.

consider the extra 1% an advance contribution which just happens to be allocated to the employees this year and then, next year, reduce that year's contribution by the 1%.

In effect, an advance contribution has been made, the deduction taken in the current year, without any excise tax imposed, and the employer gets "whole" in the following year.

Simple, neat, avoids potential fees (administrative, legal and regulatory) and makes everyone happy - except, of course, the person who set up the program for the discretionary advance contribution and did not recognize the non-participants and who is now looking for another job.....

[This message has been edited by Larry M (edited 07-01-2000).]