Employer withdraws money from the plan

[cmick]

Hi,

An employer deposited more money than necessary into the plan for a profit sharing contribution, and then decided to simply take the money out of the plan. It was money in the holding account, and had not been allocated to the participants. However, it still shouldn't have come out of the plan. Does anyone know what the penalty is for this?

Thanks!

[K2retire]

I agree with you that it should not have happened. But I've seen lots of record keepers do this any time the plan sponsor asks and I've never heard of anyone getting caught or penalized. That makes it hard to explain to clients why they shouldn't do it.

[Kevin C]

There isn't enough information in the OP to be able to tell if the return of assets to the employer was proper or not. If the Employer changed it's mind about how much they contributed, I agree it was improper. However if there was a mistake of fact that caused too much to be contributed and the plan allows the return of contributions made by a mistake of fact, the employer's timely actions would be proper.

See Rev. Ruling 91-4.

[cmick]

Thanks for the answers.

Kevin, I suppose the employer could make an argument for mistake of fact, but I'm not sure how acceptable the IRS would find the argument. In prior years a larger profit shairng contribution was required to satisfy non-discrimination testing. So the employer deposited enough money to satisfy the requirement in prior years, however, when less money was needed, the employer decided to withdraw the excess that had been contributed.

[Kevin C]

If they deposited before a contribution calcuation for the year was done, I don't see that as a mistake of fact.

If they asked for the calculation of a contribution amount, deposited the calculated amount and later found out that someone made a mistake or that there were errors in the data used, I see that as a mistake of fact.

The IRS will look at it on a case by case basis.

From Rev Ruling 91-4:

The determination of whether a reversion due to a mistake of fact or the disallowance of a deduction with respect to a contribution that was conditioned on its deductibility is made under circumstances specified in section 403©(2)(A) and © of ERISA, and therefore will not adversely affect the qualification of an existing plan, will continue to be made on a case by case basis. In general, such reversions will be permissible only if the surrounding facts and circumstances indicate that the contribution of the amount that subsequently reverts to the employer is attributable to a good faith mistake of fact, or in the case of the disallowance of the deduction, a good faith mistake in determining the deductibility of the contribution. A reversion under such circumstances will not be treated as a forfeiture in violation of section 411(a) of the Code, even if the resulting adjustment is made to the account of a participant that is partly or entirely nonforfeitable.

The maximum amount that may be returned to the employer in the case of a mistake of fact or the disallowance of a deduction is the excess of (1) the amount contributed, over, as relevant, (2)(A) the amount that would have been contributed had no mistake of fact occurred, or (B) the amount that would have been contributed had the contribution been limited to the amount that is deductible after any disallowance by the Service. Earnings attributable to the excess contribution may not be returned to the employer, but losses attributable thereto must reduce the amount to be so returned. Furthermore, if the withdrawal of the amount attributable to the mistaken or nondeductible contribution would cause the balance of the individual account of any participant to be reduced to less than the balance which would have been in the account had the mistaken or nondeductible amount not been contributed, then the amount to be returned to the employer must be limited so as to avoid such reduction. In the case of a reversion due to initial disqualification of a plan, the entire assets of the plan attributable to employer contributions may be returned to the employer.