Error in Amount of Comp Paid Resulting In Extra Deferrals

[SycamoreFan]

A client has a 401(k) plan that matches dollar-for-dollar up to 4% of Compensation. Compensation is defined to include bonuses. Participant A elected to defer 4% of Compensation into the Plan. Participant A was paid a bonus of $25,000, and therefore, $1,000 was electively deferred into the Plan and a $1,000 match was also contributed into the Plan. Two weeks later payroll discovers that Participant A should have received a $10,000 bonus (which would have resulted in only $400 being electively deferred into the Plan and a $400 match also being contributed into the Plan). So, due to the erroneously large bonus, an excess $600 of deferrals and $600 of match were contributed to the Plan account. The client would like to know there options for fixing this situation.

If no applicable IRS limits were breached, it doesn't seem to me that the result is a plan qualification failure that would require correction under EPCRS, for example, as an "Excess Amount." Could the client just take the excess $600 of deferrals out of the Plan and pay to the participant (and then require full repayment from the Participant of the excess bonus ($15,00) and return the excess $600 in match to itself? Could the client recoup the amount by reducing future compensation and therefore not taking deferrals from that compensation? I can several different possibilities here, but the real question is am I right that this would be outside EPCRS and how are companies dealing with this type of legitimate compensation error when it occurs?

[Lou S.]

sounds like a mistake of fact. I'd forfeit it and use it to fund the next payroll. It was money he received erroneously due to payroll error.

[Kevin C]

If you apply the excess to a later payroll, make sure you don't violate the prefunding prohibitions in 1.401(k)-1(a)(3)(iii)(C ) and 1.401(m)-1(a)(2)(iii)(A).

You may want to check your plan document for a mistake of fact provision. Most plans allow the return of contributions made due to a mistake of fact.