Mistake of Fact ???!!!

[BW]

An eligible employee is deferring into the plan. This participant then moves into an ineligible class (He became a non-resident alien).

The employer failed to stop deferrals into the plan for 2013 and part of 2014.

In accordance with the concept of EPCRS my proposed solution would be to treat this as a minor operational defect. To put the plan back to where it would be if the defect hadn't occurred I'd propose wire the deferrals back to the participant and forfeit the match.

A major vendor has proposed treating this as a mistake of fact, with a correction that would forfeit the match AND the deferral and correction via payroll.

I can't get my head around that. Am I missing something?

[ETA Consulting LLC]

Where did he receive his income once he became a nonresident alien? Where was he working?

[BW]

He was a resident alien.

Payroll must have been via the employer's payroll system since deferrals continued. He was somewhere in South East Asia when this occurred.

Two CPA's have weighed in that he was not eligible. They both seem to agree the deferrals need to be returned.

[ETA Consulting LLC]

Is he a "resident" alien or a "non-resident" alien. Does he have any US Sourced Income? Is the income he received from services provided outside the US?

[BW]

For the period in question he was a non-resident alien with no U.S. source income.

[QDROphile]

It is not a "mistake of fact" as the IRS has informally described how it understands that term. No comment on the correction proposal.

[Peter Gulia]

Even if the plan's administrator might have acted under a good faith mistake of fact, hasn't too much time passed?

[BW]

I think that is why they suggested forfeiture of both the match and deferral.

[Peter Gulia]

I'm confused; beyond a forfeiture or non-allocation of a matching contribution, does the vendor suggest a forfeiture of the elective deferral, rather than a return of the wages that ought to have been paid?

[rcline46]

I am even MORE confused. How were deferrals even taken from non-US sourced income as stated in Post #5? This is the fundamental question, and these deferrals (the ones in question I think).

We can discuss correction methods after we know how the error happened.

[BW]

The how is actually straight forward. The company is international. It is not uncommon for Europeans to come stateside and obtain eligibility. The company also does work in emerging markets. When they send someone to a place like Nigeria the employee negotiates pay in Euro's or dollars. If they get paid in dollars the U.S. division issues the pay. It would seem to make for a rather complicated tax filing situation but these people are very well paid. This is effectively the situation. In many cases the Europeans won't choose to participate but this one did.

The CPA was filing for the refund and noticed the deferral.

From my perspective the fix seems pretty straight forward. This was not eligible compensation and needs to be returned with the corrected 1099. The match should be forfeited.

What is blowing my gasket is an 800 pound gorilla of a plan vendor is suggesting deferrals be forfeited. In 20 years of doing this I've never heard anyone credible suggest that as solution.

[ETA Consulting LLC]

Here's what you are missing:

Nothing we do is logical or reasonable; EXCEPT for following the written terms of the plan. So, as a practice, we look to the plan or EPCRS for guidance is how to address certain issues. If a participant defers $18,000 in the plan and exceeds the 2014 402(g) limit, the plan actually has written language the prescribes for the distribution by April 15th of the following year. Once you get beyond April 15, the plan's provisions are no longer address your situation; leaving you with EPCRS.

In this case, the plan sponsor simply failed to follow the terms of the plan by allowing someone to participate who was not eligible under the plan's written terms. The plan will not have language to address this; which leaves you with EPCRS. IF you believe your issue is corrected under SCP (Self Correction Program), then that is the route you would take.

Your contention appears to be that this is correctable under SCP by returning the deferrals and issuing the 1099 while forfeiting the match. The vendor, who I presume is AXA (e.g. 800 lb gorilla), is apparently suggesting that you forfeit the deferrals and match while revising the W-2 forms and making the individual whole outside the plan.

I won't make a suggestion as to the viability of any approach, but these are the general parameters I typically use.

Hope this helps.

Good Luck!

[Stable Two Financial]

Thanks for the thoughts ETA,

I can agree that often logic plays little part in the answers we ERISA nerds give our clients.

It is not AXA but you are correct in that I think this could be correctible under SCP. There is no guidance I can stand on since, as you correctly state, neither the plan document nor the standardized corrections under EPCRS really address this. Nonetheless, if we put the plan back into the position it would have been in had the defect not occurred the money would not be in the plan.

I'm just gobsmacked that any major vendor would recommend forfeiture of deferrals. How, why could you do THAT?

[Stable Two Financial]

And yes Stkmastr is Stable Two Financial

[ETA Consulting LLC]

I'm just gobsmacked that any major vendor would recommend forfeiture of deferrals. How, why could you do THAT?

To answer your question on that: The argument here is that they are not deferrals made under the written terms of the plan. Therefore, they should not be tested within the ADP test and should not be treated as deferrals for plan purposes. So, if you were to forfeit them and make the participant whole outside the plan, then this would effectively put the plan in the condition had the deferrals not happened.

I'm not saying I would agree with this, but understand how their position could be reasonable.

Hope it works out for you :-)

[Peter Gulia]

If the vendor asserts the usual stance that it is not the plan's administrator, not a fiduciary, and does not render accounting, tax, or legal advice, is there any reason the plan's administrator does not politely decline to follow the vendor's suggestion and instead use the advice of someone who is professionally responsible for his or her legal advice?

[Stable Two Financial]

I'm just gobsmacked that any major vendor would recommend forfeiture of deferrals. How, why could you do THAT?

To answer your question on that: The argument here is that they are not deferrals made under the written terms of the plan. Therefore, they should not be tested within the ADP test and should not be treated as deferrals for plan purposes. So, if you were to forfeit them and make the participant whole outside the plan, then this would effectively put the plan in the condition had the deferrals not happened.

I'm not saying I would agree with this, but understand how their position could be reasonable.

Hope it works out for you :-)

That's actually a thought provoking approach. Not saying I agree.....

Sadly this was not the theory. My observation with this vendor is they've lost a lot of talent in the Legal/Compliance departments and Mistake of Fact is the go to solution for any situation involving deferrals.

[Stable Two Financial]

If the vendor asserts the usual stance that it is not the plan's administrator, not a fiduciary, and does not render accounting, tax, or legal advice, is there any reason the plan's administrator does not politely decline to follow the vendor's suggestion and instead use the advice of someone who is professionally responsible for his or her legal advice?

It's like you've read their service agreement. Your suggestion is my game plan.