Wrong Contribution what to do with interest

[PFranckowiak]

The Employer incorrectly reported $5,000 too much deferral for a HCE. We are removing the $5,000 plus the interest that was accumulated to make his account accurate. 

The over contribution we are using to reduce the next contribution that the Employer makes.

What options do we have for the interest.  (It's several hundred dollars)?

 

[RatherBeGolfing]

What actually happened here? They reported too much or the HCE deferred too much?  Two very different scenarios.

If the HCE deferred too much the excess and interest are distributed and reported on form 1099. If they simply reported too much, there would be no contribution or interest to correct right?

[PFranckowiak]

They reported an extra $5,000 because the payroll person didn't take it off the deposit sheet from a previous deferral.   It was never taken from the EE's pay. 

[BG5150]

The contribution and its earnings go into a suspense account to fund the ERs next contribution (other than deferrals).  In fact, the ER can make no contributions until that suspense account is exhausted. (EPCRS 6.06 (2))

[RatherBeGolfing]

So never taken from EEs pay but deposited from Employer funds?

In that case, I would move both the deposit and associated earnings to forfeiture and use for future contributions or fees. 

[PFranckowiak]

I was not sure if we could use the entire amount for fees?  I thought that since the $5,000 was deposited as a contribution, we would have to use that for a contribution.

 

 

[RatherBeGolfing]

6 minutes ago, BG5150 said:

The contribution and its earnings go into a suspense account to fund the ERs next contribution (other than deferrals).  In fact, the ER can make no contributions until that suspense account is exhausted. (EPCRS 6.06 (2))

 

2 minutes ago, PFranckowiak said:

I was not sure if we could use the entire amount for fees?  I thought that since the $5,000 was deposited as a contribution, we would have to use that for a contribution.

I am a little unsure on this one to be honest.  I think BG is correct that it has to be used for contributions and that no further contributions can be made until exhausted per 6.06(2).

[BG5150]

No fees.  Must be used for contributions.  These are excess allocations, not forfeiture of unvested money.

[RatherBeGolfing]

As a follow up, the unallocated account would not have the same restrictions as a true forfeiture account, correct?

What I mean is, if the plan is deferral and safe harbor only, and $5,000 was deposited and removed, can it used to fund safe harbor contributions?  

[RatherBeGolfing]

1 minute ago, BG5150 said:

No fees.  Must be used for contributions.  These are excess allocations, not forfeiture of unvested money.

I think that answers my follow up.  Thanks BG

[BG5150]

And, yes, they can be used for SH.  At least that was the opinion of several ERISA attorneys I've worked with.

[RatherBeGolfing]

Just now, BG5150 said:

And, yes, they can be used for SH.  At least that was the opinion of sever ERISA attorneys I've worked with.

That makes sense since it isn't actually forfeiture, just an unallocated account. Which would also be why it cannot be used for fees...

Thanks!

[PFranckowiak]

So the interest earned should be used to offset the next contribution to the plan also?

 

 

[RatherBeGolfing]

10 minutes ago, PFranckowiak said:

So the interest earned should be used to offset the next contribution to the plan also?

Yes.  6.06(2) uses the language excess allocation adjusted for earnings so the interest should be used to offset contributions as well.

[BG5150]

22 minutes ago, PFranckowiak said:

So the interest earned should be used to offset the next contribution to the plan also?

 

 

Or, you could just send it to me.  I won't tell...  ;)

[PFranckowiak]

Seems like the ER is getting paid for their mistake!   

Since it has to be used as soon as possible, I assume we cannot wait and use it for the matching contribution for last year?  They will be depositing that as late as they can.  Otherwise since it was found after year end, it would be reducing contribution for the next year.  Just want all options before I talk to the client about the correction.

[RatherBeGolfing]

1 minute ago, PFranckowiak said:

Seems like the ER is getting paid for their mistake!   

How? It was ER money that was deposited, why shouldn't they get to use it?

[RatherBeGolfing]

2 minutes ago, PFranckowiak said:

Since it has to be used as soon as possible, I assume we cannot wait and use it for the matching contribution for last year?  They will be depositing that as late as they can.  Otherwise since it was found after year end, it would be reducing contribution for the next year.  Just want all options before I talk to the client about the correction.

Are they making any other ER contributions until they make the match contribution next year?

Quote

6.06(2) 

 ...While such amounts remain in the unallocated account, the employer is not permitted to make contributions (other than elective deferrals) to the plan.

 

[Kevin C]

Does the plan document allow the return of contributions made due to a mistake of fact?  Most plans do.  With the regulations prohibiting prefunding of deferrals and match, it often works out better to return the excess to the employer.

[ETA Consulting LLC]

Typically, when a mistake happens, you're going to end of violating some other established protocols just to correct that mistake.  This is why EPCRS continue to emphasize 'reasonable approaches'.  We can easily find something wrong with any approach taken, but the key is to get the plan in a position as close to the position it would've been had the mistake not occurred. 

Obviously, the $5,000 has to be removed from the account.  Merely using that $5,000 to offset the next set of deferrals would make everything (from the contribution perspective) balance.  But you know have an issue with the earnings.  A participant has gotten a $200 payday in increase earnings for extra funds being 'parking-lotted (I know that's not a word)' in his account.  Those funds should be removed and (in my opinion) used to offset plan expenses or reduce future contributions. 

My only point into this post is to emphasize the validity of 'reasonable method' and the need to document anything you do as why you believe it's reasonable.  Even on IRS audit, they may ask you to defend your reasoning (and may even shoot you down), but that's typically how these issues work.

Good Luck!

[BG5150]

8 minutes ago, ETA Consulting LLC said:

Obviously, the $5,000 has to be removed from the account.  Merely using that $5,000 to offset the next set of deferrals would make everything (from the contribution perspective) balance.  But you know have an issue with the earnings.

You cannot use the $5,000 to offset deferrals.

[BG5150]

2 hours ago, PFranckowiak said:

(1)  Seems like the ER is getting paid for their mistake!   

(2) Since it has to be used as soon as possible,

(1)  The ER could have had that $5,000 invested somewhere and getting earnings outside the plan.

(2)  Nothing says it must be used "as soon as possible."  It says the company can make no other ER contributions (match included) until the suspense account is depleted.  I see no problem waiting until next year when they allocate the match, to use these funds.

[ETA Consulting LLC]

Practitioners have been processing negative payroll contributions in order to correct over-deposited amounts during previous payroll cycles for the longest time now.  I remember back in the early 2000s (or late 1990s) arguing why it was best to correct under the separate transaction and adjust for earnings as opposed to merely disguising the error through a negative payroll contribution.  I, distinctly, remember being over-ruled on that argument (at my employer) for sake of operational efficiency.  I find it interesting that the conversation, now, is about everything 'we cannot do'.  Anytime I encounter a situation where every alternative is fraught with issues, then I suggest that a VCP submission will give you all the comfort you seek.  The argument, then, is not about what can or cannot be done (because a Compliance Statement will settle this), but more about whether the level of comfort is worth the cost of the submission; especially when it involves a correction method already being discredited under a self-correction routine.

Good Luck!

[BG5150]

We all agree that $5,000 + earnings (or less the losses) must be removed from the participant's account.

Either put it in a suspense account or send it back to  the employer under the nebulously-defined 'mistake of fact' provision of the plan.

That's it.

Although, good luck with getting the suspense account thing right if they aren't used right away and there are true forfeitures under the plan.  I haven't seen a r/k system that even has a suspense account feature.

[BG5150]

Don't forget.  As part of any self-correction under the mantle of EPCRS, the plan administrator must put in place procedures to ensure the mistake does not happen again.  Keep that with the other documentation of the correction.