Deferral deposits to the wrong person - is it "late"?

[AlbanyConsultant]

This has to be pretty common - the harried HR manager puts the deferral amount on the wrong line of the template on the product platform's website so that Particpant A doesn't get his $50, but Participant B does.  We find it months later when we do our annual reconciliation because neither A nor B read their quarterly statements (or any of the gazillion notices, but that's for another day).

 

Is this a "lost earnings" situation?  On the one hand, Participant A did not have the access to his deferrals, so he was denied use of the money.  On the other hand, the Trust was not shorted anything, and the employer did not have use of the funds.  What takes precendence?  I'm trying to get some outside opinions because I find that people in my office are doing it both ways, and they are passionately defending their side.

 

Just as importantly - how would you correct it?  Transfer the overage from B to A?  Have the plan sponsor drop in an additional amount for A and short B's next deposit?  Have you had one method work consistently better?

 

Thanks.

[QDROphile]

With respect to the prohibited transaction issue, the timing requirements relate to separation from the employer's assets and delivery to the trust.  Credit to individual accounts is not involved.

I will let others speak to the plan disqualification and contract issues (not administering the plan in accordance with its terms). 

[K2]

Trying to straighten out the earnings on something like this takes a lot of unnecessary time and effort given the amount.  But that said, I think the basic premise is to put everyone into the position they would have been in had the error not been made.  That means taking the money and the associated earnings from the participant who received it in error.  And depositing the amount plus associated earnings into the right persons account.  The earnings to the right person would be based on their investments.  The gains/losses from the person who received the erroneous amount should be actual as well.  This is what you would likely do if it was a significant amount, like for example depositing someone's rollover account into the wrong person's account.

I don't think the deposit was late, and I wouldn't be doing a VFCP filing or reporting it on the 5500.

[ESOP Guy]

I agree with kcbrim the correction needs to put both people back to where they would have been if the error wasn't made. 

The person who got the funds in error should not receive any kind of windfall from the error.

The person who got shorted in funds should not be subject to any kind of shortage.

Back when I did daily valued 4k plans I would have been expected to figure out how many units where purchased in the person who got the money any dividends paid (and units bought with those dividends) and get them out of his account.  I would then have been expected to compute how many units the other person should have gotten and any dividends they should have received (and units they would have purchased) and that would go into their account. This was based on their investment election and hopefully they didn't change during this time frame as that just made it more complex.

If that resulted in too little money in the plan the firm that made the mistake had to add money.  If there was too much money it got less clear who got that.  That was the one time the person who got the deposit in error might get a windfall.

I understand the point this is small and what I described might be costly in terms of time.  Someone else can decide if it is worth it but that was always the expectation back in the day. 

[RatherBeGolfing]

I agree with the comments above, this is not a late deferral since that has to do with when the assets left the employer and was deposited to the trust.  That clearly occurred.

This is another problem all together.  Is there an easy way to determine what the deferral should have earned had it ended up in the right account? After that it is a "simple" matter of making making each participant whole.  The person who got the extra deferral should not benefit from it and the person who was shorted should not lose out because of it.

To add an extra wrinkle, the correction could also vary depending on the recordkeeper.  Some RKs will insists on an earnings calculation if you move a mistaken deposit from one participant to another, while others will be fine with just transferring the deferral.