deposit error attributable earnings

[LMK TPA]

A participant's safe harbor match for 2024 should be $3,000.  Payroll company deposited $4,800.  The account had positive earnings for 2024

(1) I assume we calculate attributable earnings on the excess deposit and move $1800 plus earnings to the cash account.  Is this correct?

(2) What are the options to use the $1,800?  Can it be used to fund 2025 safe harbor match deposits?  Should it be allocated as a discretionary match for 2024?  Could it be used to pay our fees?

(3) I feel like the attributable earnings shouldn't be used to fund a contribution.  Can it be used to pay our fees?

Thank you!

 

 

[Peter Gulia]

Was that one participant’s allocation of the matching contribution the ONLY one that was incorrect? Might there be other participants credited with an amount more than the correct allocation? Or some credited with an amount less than the correct allocation?

If the whole amount the employer paid to the plan’s trust was more than the sum of all participants’ correct allocations in the matching contribution, is there a ground for the plan’s administrator’s finding that an amount was paid under a mistake of fact? ERISA § 403(c)(2)(A)(i), 29 U.S.C. § 1103(c)(2)(A)(i) http://uscode.house.gov/view.xhtml?req=(title:29 section:1103 edition:prelim) OR (granuleid:USC-prelim-title29-section1103)&f=treesort&edition=prelim&num=0&jumpTo=true.

If so, does the plan provide for returning to the employer its mistakenly-paid amount?

After sorting a correction of the allocations of the matching contribution, the plan’s administrator might decide how to allocate investment gains and losses attributable to an incorrect allocation.

This is not advice to anyone.

[LMK TPA]

1 hour ago, Peter Gulia said:

Was that one participant’s allocation of the matching contribution the ONLY one that was incorrect? Might there be other participants credited with an amount more than the correct allocation? Or some credited with an amount less than the correct allocation?

If the whole amount the employer paid to the plan’s trust was more than the sum of all participants’ correct allocations in the matching contribution, is there a ground for the plan’s administrator’s finding that an amount was paid under a mistake of fact? ERISA § 403(c)(2)(A)(i), 29 U.S.C. § 1103(c)(2)(A)(i) http://uscode.house.gov/view.xhtml?req=(title:29 section:1103 edition:prelim) OR (granuleid:USC-prelim-title29-section1103)&f=treesort&edition=prelim&num=0&jumpTo=true.

If so, does the plan provide for returning to the employer its mistakenly-paid amount?

After sorting a correction of the allocations of the matching contribution, the plan’s administrator might decide how to allocate investment gains and losses attributable to an incorrect allocation.

This is not advice to anyone.

Just an issue for 1 participant.  Payroll deposited a flat $400 per month as a safe harbor match based on his 2023 year pay and did not adjust the deposit for 2024 compensation.

[Peter Gulia]

Many BenefitsLink neighbors know much more than I know about TPAs' customs for this kind of error.

[Artie M]

Based on IRS guidance, the plan sponsor should transfer the forfeited employer contribution plus related earnings to an unallocated plan account.  This amount would then be used to reduce employer contributions in subsequent periods.  This sounds simple but there is a complication.  

In determining how to use the excess contribution, the IRS has stated to us during an audit where this issue came up, the timing of the actual deposits of the contributions is relevant.  Though in your case the contributions were for 2024, you must determine when those amounts were actually physically deposited.  For example, were they funded with each payroll period in 2024 or in part or all after the end of the year.  Even if per payroll period, it is possible the amount for the final December payroll was contributed in 2025.  The IRS stated that amounts physically deposited in one year can be allocated to that year and earlier years but cannot be allocated to a later year.  They said that in their view if done differently there is a danger that the plan sponsor would be accelerating deposits into an earlier year and possibly getting a larger tax deduction.  (Note that our specific issue on that audit was on a much broader scale and not with respect to just one employee and our client funded the match on a quarterly basis with the final quarter's contribution being deposited after the end of that quarter in the next year.) 

So, in your case, if all of the excess amounts were deposited in 2025, there is no issue.  The amounts could be used to reduce employer contributions in 2025 or 2026 (forfeited in 2025 and thus can be used in 2025 or 2026).  

However, if some or all of the excess amounts were deposited in 2024, you must look at the Plan document to see what alternatives are available.  That is, what other matches or employer contributions could be made to participants under the terms of the Plan that can be funded with those excess amounts deposited in 2024.  E.g., an additional match on top of the safe harbor or a profit sharing contribution.  In my client's case the amounts were significant enough to allow them to provide a small (albeit very small) profit sharing contribution to all participants.

One alternative the IRS would have permitted our client to implement (but the client opted not to) was to simply allocate those amounts to the NHCEs as a QNEC.  Since the amount here is so small, that seems like the most practical solution.

As regards a mistake of fact, quoting IRS Private Letter Ruling (PLR) 9144041:  Mistake of fact is fairly limited. In general, a misplaced decimal point, an incorrectly written check, or an error in doing a calculation are examples of situations that could be construed as constituting a mistake of fact. What an employer presumed or assumed is not a mistake of fact.  In my experience, there are very, very few mistakes of fact.  

Also, unallocated suspense account amounts are only to be used to fund employer contributions (and not to be used for plan expenses).  See EPCRS Rev. Proc. 2021-30.

I want to reiterate my sign off below...