distributions made in error

[DMcGovern]

Controlled group with two separate 401(k) profit sharing plans. They recently filed as a QSLOB. An internal coding system has created a problem when employees transfer from Plan A to Plan B. Company A is coding them as terminated, and some employees have taken a distribution of their balance.

They are working on a fix for the internal problem. Other than contacting these employees to notify them that they received a distribution in error and need to return the funds (ineligible for rollover, although I think all were lump sum) how is this corrected?

Thanks for your help!

[401 Chaos]

Have a similar issue and am curious if you ever received any guidance on this or how you addressed.

We have indiividual that was transferred to another controlled group entity and erroneously classified as terminated by old plan and received a distribution which was not rolled over. He had taxes withheld and has also spent some of the money and so is not in a position to repay the full amount or add any additional amount on for earnings, etc.

If the plan sponsor requests repayment and the participant agrees to repay as much as he has, is it possible to partially correct a premature distribution. The guidance seems to suggest that a plan sponsor has an obligation to pursue return of a premature distribution / overpayment but not push further if the individual refuses. I have not found any guidance, however, where the participant agrees to make a partial repayment. A partial repayment would seem better to me than making no repayment (although a partial repayment would presumably require some adjustment to the 1099 reporting, etc.) Just interesting that there seems no discussion around partial repayment--everything seems to assume all or nothing.

[DMcGovern]

Did find this:

Revenue Procedure 2013-12

SECTION 6. CORRECTION PRINCIPLES AND RULES OF GENERAL APPLICABILITY

.06 Special rules relating to Excess Amounts.

(4) Correction of Overpayment (defined contribution plans and 403(b) Plans) .

(a) In general. An Overpayment from a defined contribution plan or 403(b) Plan is corrected in accordance with the Return of Overpayment method set forth in this paragraph. Under this method, the employer takes reasonable steps to have the Overpayment, adjusted for Earnings at the plan’s earnings rate from the date of the distribution to the date of the repayment, returned by the participant or beneficiary to the plan.

(b) Make-whole contribution. To the extent the amount of an Overpayment adjusted for Earnings at the plan’s earnings rate is not repaid to the plan, the employer or another person must contribute the difference to the plan. The preceding sentence does not apply when the failure arose solely because a payment was made from the plan to a participant or beneficiary in the absence of a distributable event (but was otherwise determined in accordance with the terms of the plan (e.g. an impermissible in-service distribution)).

© Unallocated account. Except as provided in section 6.06(4)(d), a corrected Overpayment, adjusted for Earnings at the plan's earnings rate to the date of the repayment, is to be placed in an unallocated account, as described in section 6.06(2), to be used to reduce employer contributions (other than elective deferrals) in the current year and succeeding year(s) (or, if the amount would have been allocated to other eligible employees who were in the plan for the year of the failure if the failure had not occurred, then that amount is reallocated to the other eligible employees in accordance with the plan's allocation formula).

(d) Repayment by the participant or beneficiary. To the extent an Overpayment was solely considered a premature distribution but was otherwise determined in accordance with the terms of the plan, any amount returned to the plan by the participant or beneficiary is to be allocated to his or her account.

(e) Notification of employee. Except as provided in section 6.02(5)© with respect to the recovery of small overpayments, the employer must notify the employee that the Overpayment was not eligible for favorable tax treatment accorded to distributions from an eligible retirement plan under §

402©(8)(B) (and, specifically, was not eligible for tax-free rollover).

We did the notifications to the participants. Some returned the funds. Hope this helps!

[Kevin C]

The EPCRS provisions on overpayments were modified by Rev. Proc. 2015-27. Here is a page with a description and a link to the new Rev. Proc.

http://www.irs.gov/Retirement-Plans/New-Rev-Proc-Updates-EPCRS

[401 Chaos]

Thanks for this. My sense of the latest guidance has always been that it is intended to note added flexibility with respect to recoupment of overpayments but I guess I've not really read it to squarely address the notion of a parital repayment in the premature distribution of a 401(k) plan account. For example, it seems to me to be aimed mainly at permitting a plan sponsor to make a plan whole for erroneous payments rather than trying to recoup directly from the recipient which certainly makes sense to me when the plan administrator made the error and the participant has been taking and using the funds.

In our current situation, seems like the plan doesn't really need to be made whole. The premature distribution amounts all came out of the participant's own account and would go back in there upon correction. It just seems strange though that there wouldn't be more discussion of partial returns of overpayments in this context. Again, I don't see any real harm with a partial return as it seems a partial correction should be better than no correction. Just puzzled of the lack of discussion around those and/or some express discussion of perhaps how the plan sponsor is not required to request full returns if this is acceptable--i.e., in attempting to recoup can we say we understand you may have spent some of the money and/or not be in a position to make up the full amount?

I'm also intrigued by the 3.02-4(d) which notes the following as an area for comment:

"whether any other changes or additional guidance is needed relating to the recoupment of Overpayments, including guidance on any unusual circumstances in which full corrective payments to a plan should not be required for Overpayments"

Not sure that is really meant to get at this paritcular situation but I suppse it could reach that.