Recovery of Errorious Contribution

[richard]

Assuming the standard "return of contribution due to mistake in fact" language in a plan document, can the employer recover their contribution in the following situations?

1. The employer contributes an amount to a profit sharing plan in excess of 15% of payroll. (The employer made the contribution early in the year in anticipation of a certain level of payroll which didn't materialize.)

2. The employer contributes $X to a profit sharing plan early in the year. At the end of the year, the employer determines that they have no profit (so the $X wouldn't be deductible).

3. The employer sends a check to the trustee as payment for trustee fees. The trustee deposits into the pension plan. The employer does not want this to be included as a contribution to be deductible under Section 404 (let's assume they are in full funding). The employer would rather deduct these payments under Section 162 as has been done in the past (when the trustee did not deposit it into the pension plan).

4. In a small plan maintained by the business owner's corporation, the business owner personally (and of course erroniously) makes the contribution to the plan.

Let's also assume these are one-time events, and are clearly due to a slip-up.

So, what can we do?

Thanks

[Guest njwhite]

With respect to situations 1 & 2, it appears unlikely that the IRS would allow the contributions to be returned to the employer. This is because the IRS generally does not recognize a "mistake of fact" in cases where the employer LATER determines that a contribution will not be deductible (see Rev. Rul. 91-4). (Query: Was the profit sharing plan written to condition employer contribution on profits? This is unclear from your question and the answer may significantly impact the analysis ).

With respect to situations 3 & 4, it appears that a much better case could be made for a "mistake of fact" argument, since they essentially describe events that are very close to CLERICAL ERRORS.

Clearical errors have long been recognized by the IRS as falling within the "mistake of fact" exception to the IRC section 401(a)(2) exclusive benefit rule.

In any event, you should at a minimum review the rules in Rev. Rul. 91-4 BEFORE any contributions are returned to the employer. Also, in the event you decide to return any contributions, you should prepare committee minutes that document the facts and your analysis of why the contribution is eligible for return. Finally, since these situation can be rather tricky and the penalty for handling them incorrectly can include plan disqualification, it would be prudent to consult qualified ERISA counsel BEFORE any amounts are returned to the employer.