Overfunding Contributions

[Nassau]

When a client overfunds a wire (contributions to much money to the Recordkeeper and Trustee) or participants are taken out of the payroll file and money is left over, is the client permitted to ask the Recordkeeper/Trustee to move the money to the forfeiture account? or must the Recordkeeper/Trustee return the money to the client?

Question - Is moving the money to the forfeiture account a violation of the exclusive benefit rule? Should the overfunded amounts be returned to the client? Please state the Code/Regulation? Please note, the excess money was never placed into the participants' accounts and is truly the client's money.

[K2retire]

I've never heard of a problem with moving money to a forfeiture or other unallocated account. In order to return the money to the plan sponsor, they must show that it was contributed due to a Mistake of Fact and that is not an easy standard to meet.

[BG5150]

they must show that it was contributed due to a Mistake of Fact and that is not an easy standard to meet.

Is there any guidance as to what constitutes a mistake of fact? I've always fallen on the conservative side of the argument, but always wondered what the standards are.

[K2retire]

There is very little guidance about what is a Mistake of Fact. That's what makes it difficult. If you search for Mistake of Fact you will find several here. My favorite includes the statement, "A screw up is not a Mistake of Fact."

[david rigby]

"overfunding" may be a mistake of fact, but don't expect the IRS to ever define it. Facts and circumstances rule, but be very cautious.

[Bird]

I agree with the above, but would say that you don't want to be overcautious. I think if someone keys in a wrong number it is, or should be, a mistake of fact, and I would rather be prepared to argue that point than mistakenly move it into a "forfeiture" account and erroneously allocate it or use it for fees or whatever when it's not a forfeiture at all.

(FWIW, it would seem that in this day and age, there's a "system" issue if contributions and wires aren't in sync.)

[ESOP Guy]

To me even if the money is put into the forfeiture account it ISN’T a forfeiture so you shouldn’t treat as such. It is a pre-paid contribution to me. You don’t see them as much in daily recordkeeping, but they are more common in balance forward.

So to me you could simply short a future deposit take the missing money from the forfeiture account (as long as we are talking about the same amount).

Example:

If you were suppose to put $10,000 in deposit one, but put $11,000 into the plan. Put the extra amount into the forfeiture account for now.

Suppose a few weeks later you are suppose to put $13,000 into the plan for deposit two. I would have the employer put $12,000 into the plan and take $1,000 from the forfeiture account to make everyone’s accounts whole.

The problem is now solved and you don’t have to worry about returning money to the employer.

[Kevin C]

Depending on the amounts and timing, treating the excess as prefunded may just be creating another problem. Deferrals and match can not be pre-funded, see 1.401(k)-1(a)(2)(iii)© and 1.401(m)-1(a)(2(iii)(A).

If the excess amount is small and the correction is made with the next deposit, it will probably work as you suggest. It also helps if the employer pays in arrears. But, it doesn't work in all situations.