Mirror 401(k) Plans and Correcting Administrativer ERROR (non-ADP/ACP

[Guest smithee]

I have the following situation. Company sponsors 401(k) plan and mirror 401(k) plan. Mirror plan takes deferrals and matching contributions limited by 415 and 401(a)(17) - extra monies are automatically credited to nonqualified plan. Company discovers after end of qualified plan year that it made administrative error and did not properly limit 401(a)(17) contributions for year. This causes excess deferrals (pursuant to terms of qualified plan) and excess matching contributions in qualified plan. Company wants to transfer monies (plus earnings) to their proper place as credited in non-qualified plan (where monies would have been if error had not occurred). Third-party administrator claims PLRs state that must return monies to employee. However, I cannot find the alleged PLRs and believe they dealt with situations where ADP and ACP tests were violated which is not the case here -- it is a failure to follow plan terms. Is there a problem with distributing money out to credits in non-qualified plan (plus earnings). I feel this is equivalent to PLRs dealing with situation where monies are originally put in non-qualified plan and then post plan year transferred to qualified plan (without earnings). Any thoughts would be much appreciated.

[Kirk Maldonado]

I disagree with EAKarno.

Representatives of the IRS have repeatedly stated in public forums that the excess amounts must be taken into the participant's income; they may not be directly transferred to a nonqualified plan.

Search the back issues of the BNA Pension Reporter, and I'll bet you will find those statements.

[QDROphile]

Establishing a mistake of fact based on failure to follow plan terms is going to be difficult if you look at examples of what the IRS thinks constitutes mistake of fact. Your situation could just as easily be a mistake of law. "Gee, we just didn't know we weren't supposed to count compensation over $170,000 ...." The fact that you violate a plan term does not make something a mistake of fact.

[Kirk Maldonado]

I agree with QDROphile.

[Guest smithee]

Thanks very much to everyone who has responded. I guess I just want to cliarfy one point -- they did limit compensation for 401(a)(17). However, they did it based upon $170,000 when they should have used $160,000. Does this seem more like a mistake of fact. Does anyone have any thoughts on this? Thanks again for all the help you have been giving me.

[IRC401]

Why don't they put the excess amount on the employee's W-2 and let him defer future compensation? This problem exists only because the NQDC plan is tied to the k plan.