Can Mistake of Fact be applied to this deferral issue

[Zimkap]

Have a client plan, 5 life case, Deferrals with basic Safe Harbor Match, so no testing, there are no automatic contributions, no profit sharing contributions.

Employee made Roth deferrals and did not exceed the 402(g) limit, when the client uploaded the final payroll deferrals for 12/31/2022 instead of entering $4,500 they entered $5,500 for this employee therefore submitting $1,000 more then they should have. W2 box 12 reflects the correct Roth deferral for the year.

From what I have read about using "mistake of fact" the $1,000 would be considered a typographical error and therefore the money can be returned to the Employer

Was just looking to see if anyone has any additional thoughts or has used mistake of fact for return of erroneous contributions 

Michele 

[Lou S.]

I think you would probably be fine with the correction you propose as fixing a data entry error. Though you'd probably be on even stronger ground if you simply removed the erroneous deposit from participant, left it in plan, and used it to offset the next deposit. Same result, but the money never leaves the plan to go back to the employer.

[Zimkap]

 

I actually thought about leaving it in and offset future deposits but did not think that would fly. Much easier to do that

Thank you very much Lou!

[Paul I]

If the employer deposits more into the plan than the employee elected to defer, that additional amount is an Excess Amount.

If you look at EPCRS §5.01(3)(b), you will find the definition of an "Excess Allocation. The term "Excess Allocation" means an Excess Amount for which the Code or regulations do not provide any corrective mechanism." and " Excess Allocations must be corrected in accordance with section 6.06(2)."

EPCRS §6.06(2) notes that "... Excess Allocations that are attributable to elective deferrals or after-tax employee contributions (adjusted for Earnings) must be distributed to the participant. For qualification purposes, an Excess Allocation that is corrected pursuant to this paragraph is disregarded for purposes of 402(g) and 415, the ADP test of 401(k)(3), and the ACP test of 401(m)(2)..."

Using these rules, it seems you should be able to refund the $1000 to the employee with earnings, and not include the $1000 in the annual deferral limit or ADP test (among other tests).  I believe EPCRS goes on to say the refund is taxable in the year the refund is made.

It's worth a look.

[Bri]

That seems crazy, like you're just giving the guy an extra $1,000 because of the data entry error.