Distribution Overpayment

[GrammieMame]

401(k) Safe Harbor Plan. Employee has participant directed salary deferral and safe harbor match accounts and an employer directed pooled account holding employer contributions. Due to a clerical error, the employee was overpaid from the ER account by $500. In his annual statement, his total account value is positive but the employer contribution account is -$500.

We are sure the employee would not agree to repay the $500. Could the money be repaid as a deduction from his pay? How about transferring $500 from his safe harbor match account to the pooled employer contribution account so that he would have a $0 balance in his employer account rather than a negative balance?

[ETA Consulting LLC]

This is more likely a recordkeeping issue since the participant does have money in the plan; so a source switch on the transactions may be in order. A 1099R form doesn't account for which bucket the money comes from within the plan. However, the terms of the plan should allow a distribution from that other source.

Good Luck!

[00hskrgrl]

We are sure the employee would not agree to repay the $500.

Are you saying that the employee received a distribution from the plan that was $500 above what he should have received? If so, I believe ERPCRS requires that the plan sponsor attempt to recover the overpayment. State law may impact what could be withheld and the hoops the employer must jump through before withholding pay.

Also want to add that if it was a distribution and it was direct-deposited somewhere, you might be able to recover it directly if your direct deposit form contains language about debiting accounts in the event of an error. My past employer had that language on the form, so any time someone signed up for a direct deposit, they were agreeing to have overpayments directly debited as well - sure made things easy in the rare event an overpayment was made.

If the situation is such that the total account balance is correct and there's just an imbalance between sources, then I agree with ERISAtoolkit - a resourcing of the money should fix the problem.

[mbozek]

We are sure the employee would not agree to repay the $500.

Are you saying that the employee received a distribution from the plan that was $500 above what he should have received? If so, I believe ERPCRS requires that the plan sponsor attempt to recover the overpayment. State law may impact what could be withheld and the hoops the employer must jump through before withholding pay.

Also want to add that if it was a distribution and it was direct-deposited somewhere, you might be able to recover it directly if your direct deposit form contains language about debiting accounts in the event of an error. My past employer had that language on the form, so any time someone signed up for a direct deposit, they were agreeing to have overpayments directly debited as well - sure made things easy in the rare event an overpayment was made.

If the situation is such that the total account balance is correct and there's just an imbalance between sources, then I agree with ERISAtoolkit - a resourcing of the money should fix the problem.

I dont think that overpayment can be recovered in the event of a rollover if there is language in the direct deposit form about debiting account in the event of an error because account balances in an IRA are considered non forefitable (Reg. 1.408--2(b)(4)) and the custodian will be exposed to a claim form the IRA owner if funds are removed without permission. Similarily non alienation requirement prevents funds from being being removed from a qualified plan.

I dont thinnk state labor laws would permit docking employee pay by $500 because plan assets are not wages and in most states employer can only recover overpaid wages by bringing an action against employee for the overpayment.

[00hskrgrl]

I dont think that overpayment can be recovered in the event of a rollover if there is language in the direct deposit form about debiting account in the event of an error because account balances in an IRA are considered non forefitable (Reg. 1.408--2(b)(4)) and the custodian will be exposed to a claim form the IRA owner if funds are removed without permission. Similarily non alienation requirement prevents funds from being being removed from a qualified plan.

Thanks for the clarification, and I agree whole-heartedly with your points! In past experience with overpayments on rollover situations, we have had some success getting an overpayment returned from a new trustee/custodian (depending on qualified plan or IRA) by sending a letter to the new trustee/custodian (with a copy to the participant) indicating the problem and that the excess payment was not a qualified rollover. Qualified plans generally don't want to keep non-qualified assets in their plan, and IRA's seem willing to work with their clients to get these types of issues resolved. If the money can't be recovered from the new plan/IRA, be sure the 1099-R correctly reflects the overpayment as not eligible for rollover. (This usually makes for an unhappy participant who may then pay a 10% early withdrawal penalty and taxes and gets their tax return red flagged due to mismatches between the Forms 1099-R and 5498, but at that point it becomes their problem with the IRS.)