Operational Failure - failure to stop deferrals

[Guest nathang]

A participant who had been deferring to a 401(k) plan elected to stop their deferrals in May of 2013. The participant was employed by two separate divisions within the organization and the plan sponsor correctly coded the payroll system for 1 of those divisions to stop the deferrals, but they failed to do so for the other division. As a result, whenever she was paid from 1 of the divisions from May of 2013 through current, she had deferrals withheld that should not have been. She did not work too much for this division and her deferral percentage was fairly low, so I am not surprised that she did not notice the withholding on her pay stub. All told the amount that was deferred but should not have been was less than $60 and the amount of match she received but should not have was less than $25.

Question is, what do we do to correct this error. Should we treat the deferrals made in error (plus associated earnings) as an excess amount and distribute it and forfeit the associated match (and earnings)?

[QDROphile]

It is possible that the plan document covers excess deferrals in some detail. Otherwise you need to look at section 402 of the tax code and related regulations.

[BG5150]

Is the participant clamoring for this money?

Why not just leave it alone?

[QDROphile]

My response is mistaken. I thought you were dealing with excess deferrals, not faliure to implement deferral elections.

[Guest nathang]

BG- to answer your question - no, the participant is not clamoring for the money back. In fact, at this point they are not even aware that additional deferrals were withheld after they elected to stop deferring. Your reaction was the same as my initial reaction - that the best thing to do in this case is nothing. However, when I ran it by a coworker, he thought that we would need to correct for this situation and, since this exact situation is not addressed in EPCRS, he felt the closest match was to treat the deferrals as excess deferrals and return them (along with associated earnings) and forfeit the associated match (plus earnings).

[Belgarath]

Any updates on this? For example, since the administrative cost to "fix" something like this might exceed the cost of the error, then if the employee is amenable:

1. Just leave it in the plan, with a statement by the employee that they wish to leave it in the plan.

2. Have the employer pay the employee a little bonus, while leaving the money in the plan. Say incorrect deferrals were $200.00 - employee agrees to leave money in plan, employer pays employee a $100.00 bonus. Everyone is happy, except perhaps an auditor?

3. Etc., etc.. -  since no specific pre-approved fixes, then has to be something a little creative, yet reasonable. This can't be an unknown error...