Return of Contribution due to Mistake or Fraud/Embezzlement

[Dalai Pookah]

An employee of a sponsor of a 401(k) plan fraudulently caused deposits, in excess of what was deferred, to be made for the employee and several others in a 401(k) plan.  Now that this has been discovered, the question arises whether these additional contribution could be returned to the sponsor under ERISA §403(c)(2), mistake of fact.

This occurred in 2017 so we are within the one-year time constraint.  Thoughts?

[ESOP Guy]

Not full of real clear guidence but we had this conversation last fall.  Here is the thread for your reference. 

 

My guess is anyone who wants to give additional thoughts or idea should as this other thread doesn't give any clear answers.  It might be the nature of the problem.  

[Bird]

This scenario is limited to incorrect overcontributions; the other was more about about embezzlement and trying to recover from a plan.  The first step of removing the excess from the participants' accounts should be a no-brainer; we do it all the time for simple administrative errors.  The second step of actually removing them from the plan and returning them to the employer would seem to be totally logical, although of course much of what we do has nothing to do with logic - and my recollection of an example the IRS gave would be incorrect census data, such as a date of birth.  I'd try to leave it in the plan and use it against future contributions, and only actually return it to the employer as a last resort...with approval of ERISA counsel, blah blah.

[jpod]

I would argue that it wasn't a contribution to the plan in the first place, so the employer is entitled to recover it without regard to 401(a)(2)'s exclusive benefit requirement (which is the rule to which the mistake of fact exception is an exception). 

[Luke Bailey]

If the deposits were not consistent with the deferral elections, there is no doubt that under EPCRS they can be pulled from the participants' accounts, together with allocable earnings and placed in a suspense account within the plan; based on the timing, this can be done by self-correction. Then the money could be "burned off" by using it to make matching or other contributions that the employer would otherwise be required to make going forward.

If the employer really wants to pull the money out of the plan's trust now, then whether this is a mistake of fact contribution may be tricky and, for me to give a certain answer, would require a little research. However, on the face of it one could argue that the employer made a mistake contributing the excess amounts, even if the employee who induced the employer to contribute the amount knew what he or she was doing. Sort of another way of saying what jpod is saying above.

[Dalai Pookah]

I agree keeping it in the Plan is a no-brainer.  I think my argument would be that it was not an employer contribution, but rather the result of an ultra vires act of an employee, trying to steal funds from the employer and using the plan as a place to stash it.  Therefore, it was a mistake of fact that the sponsor caused incorrect amounts to be deposited.

I would check with the ERISA attorney, however, I am he (or is that He is I).