deferrals improperly withheld from post-severance compensation - correction?

[t.haley]

401k plan excludes post-severance compensation from definition of compensation for purposes of deferrals and matching contributions.  Employer improperly withheld deferrals and made matching contributions on last paycheck received after participants terminated.  What is the correction?  Does it depend on whether the participant has received a distribution of their plan account?  I initially assumed the correction would be to return the improper deferrals to the participant (and issue a 1099?) and forfeit the matching contribution.  That works if the participant has not yet received their distribution.  If they have already received their distribution, then they have received those improper deferrals - is the correction then to issue a 1099 for the matching contribution only (assuming they have already received a 1099 for the distribution of their plan account)?

[Bri]

You've got the basic gist - forfeit the match they shouldn't have gotten, use it to fund everyone else next week.

As for the 401(k) amount - they can issue that refund as an EPCRS correction, code E.  It'll be taxable this year if they do it now, and will essentially serve to offset the extra deduction amount which will show up on their W-2 at the end of the year.  Another valid choice is to run a makeup paycheck showing "negative 401k" - that way the participant gets it in his/her paycheck.  And the account balance is then also forfeited, since that was an erroneous employer contribution, which the employer would use in the future, too.

If the person's already been overpaid, then it goes into the latest EPCRS rules for recovering Overpayments.  I suppose you could look into whether or not the post-severance compensation is at least eligible to be considered 415 compensation, and possibly do a corrective amendment to adjust just his definition of compensation for 2022.  And could the extra match be re-categorized as a discretionary nonelective amount for the person?  One of those things where, if the testing's not an issue, just retro-fit the document to match what you did so that nobody's faced with re-issued tax forms and that the person's payment amount ends up conforming to what's in print.

 

[Pam Shoup]

I do have a question.  Is this paycheck truly severance pay or is it for pay earned up to the minute of termination, plus any pay they were entitled to (Vacation, PTO, etc.) as a result of their employment, that was paid after their last day of work?  Most employees have a paycheck or two after their last day of work that would be considered as compensation they actually earned and those pays would require deferrals/match, unless the employee executed a new Salary Reduction Agreement. 

True Severance pay would be monies paid as a result of their termination, that was not otherwise earned, and therefore not compensation for plan purposes.