401k Loan Payments Not Stopped

[apcf]

I have a participant whose loan was repaid on one payroll, however the loan payment deduction was not stopped for two more payrolls. Can I just refund the incorrect deductions to him?

[Bird]

Did the money go into the plan?  If not, then it's not a plan issue, it's a payroll issue, and yes, presumably you would pay him any incorrectly withheld monies.

[Larry Starr]

7 hours ago, apwam said:

I have a participant whose loan was repaid on one payroll, however the loan payment deduction was not stopped for two more payrolls. Can I just refund the incorrect deductions to him?

I believe the funds, if paid to the plan, do not belong to the plan (they are erroneous) and should be returned to the participant.

[Mike Preston]

10 hours ago, apwam said:

I have a participant whose loan was repaid on one payroll, however the loan payment deduction was not stopped for two more payrolls. Can I just refund the incorrect deductions to him?

Probably. 

I agree with what's been said. With one exception. The plan can't suffer a loss due to this erroneous deposit and subsequent refund. This is possible if there has been a significant period of time between the deposit and the refund. Anything insignificant can be ignored., if there has been a loss that is significant the refund won't make the participant whole. That is the responsibility of the plan sponsor.

[30Rock]

Is another alternative to set up an after tax basis source?

[BG5150]

10 minutes ago, 30Rock said:

Is another alternative to set up an after tax basis source?

I think that would be more trouble than it's worth.

[JackS]

43 minutes ago, 30Rock said:

Is another alternative to set up an after tax basis source?

I don't think so.  Even if the plan permitted it, the participant did not elect it.  I think it needs to come out of the participants account, adjusted for losses not gains.  The employer can make the employee whole by correcting the payroll and paying the employee the funds that way.  I would normally suggest the employer transfer the overpayment to a forfeiture or plan account and use it to offset future contributions.  This avoids the hassle of processing a distribution from the plan to refunding it to the employer and any appearence of a reversion.  Some recordkeeping systems permit negative contributions which can be a very easy way to correct the transaction on the plan end.

[apcf]

The money did not go into the plan, thankfully their system rejected the submission due to the payment being applied to a paid off loan. We're going to just refund the improperly deducted amount.