Refund of Contributions EE Request

[jennc1019]

Hi-

I have an employee who elected the Roth within our plan and had one deduction. She is stating she didn't mean to sign up for it and changed back to all pre-tax. She is reqeusting a refund for the one pay period where the Roth was withheld. Since she made a Roth election which was correctly withheld in PR are we allowed to refund her? I have always gone with we need to withhold based on the elections made. Are we able to refund the deduction based on her reqeust? I can't find any wording to back up either way.

Thanks!

[QDROphile]

With respect to cafeteria plans, in which the stakes are higher because elections cover the entire year, the IRS has informally commented that a mistaken election can be corrected. That leads to a lot of discussion about how it is determined that an election is truly mistaken and the IRS assertion that a mistaken understanding of the tax effect of the election is not the kind of mistake that would be eligible for correction.

Because of that assertion and the more limited scope of the "mistake" (only one pay period, then the election can be changed under normal procedures depending on plan terms), I would not get into the mess of looking behind the surface of the election paperwork and into the mind of the participant. The matter is not important enough for the plan to go out on a limb. I am unaware of any reliable authority that would allow recharacterization of the election or "refund" of the deferral.

[jennc1019]

With respect to cafeteria plans, in which the stakes are higher because elections cover the entire year, the IRS has informally commented that a mistaken election can be corrected. That leads to a lot of discussion about how it is determined that an election is truly mistaken and the IRS assertion that a mistaken understanding of the tax effect of the election is not the kind of mistake that would be eligible for correction.

Because of that assertion and the more limited scope of the "mistake" (only one pay period, then the election can be changed under normal procedures depending on plan terms), I would not get into the mess of looking behind the surface of the election paperwork and into the mind of the participant. The matter is not important enough for the plan to go out on a limb. I am unaware of any reliable authority that would allow recharacterization of the election or "refund" of the deferral.

Thank you!

[hr for me]

One bone to throw the participant is that one Roth contribution started the 5 year clock so if she does decide to do a Roth contribution later, it would be to her benefit to leave that one on the books for taxability purposes of earnings in the Roth account.

That said, I have to agree that I would not recharacterize it if that is what she originally chose, even for just one payroll period because not only is it a plan issue, but also a tax/payroll issue.

[GBurns]

To add to the rationale given by QDROphile and hr for me, I would also not recharacterize because the IRS Retirement Plans FAQ make a point of saying so;

See Q 10:

https://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-on-Designated-Roth-Accounts#conts