"Clawing back" funds contributed erroneously to participants for many years

This is a general question - have just been presented with an ERISA 403(b) plan that has been operationally botched for an as yet untold number of years - could be 4, could be 13. VCP all the way unless ERISA attorney advises them to ignore the problems and start clean next year. Very doubtful...

Among the MANY transgressions, people ineligible for employer nonelective contributions have received them, for as far back as this goes. Plan is 100% immediately vested. Just wondered if anyone has ever SUCCESSFULLY negotiated with the IRS to have such contributions removed from their accounts and reallocated? I can't imagine that the IRS would allow this, but maybe someone has tried it with success?

They could retroactively amend the plan to allow those ineligible employees to become eligible and keep the contributions.

But, more specific to your question, isn't this similar to a correction of an "Excess Allocation" (employer contribution beyond what was permitted under the terms of the plan) under EPCRS that requires using the "Reduction of Account Balance Correction Method" in section 6.06(2)?

Even if ERISA and the plan’s governing documents do not otherwise preclude an adjustment of mistaken allocations, read (or suggest that your client’s lawyer read) the annuity contracts and custodial-account agreements.  The employer/administrator might have no right and no power to unravel amounts credited under those contracts.

All excellent points. EBE - I suspect, for many reasons, that the employer does NOT want to attempt to claw back any funds already contributed, but I'm just exploring possibilities before talking to them. I was assuming the retroactive amendment would be the path taken. About the only thing that can be said that this plan did RIGHT was to properly restate, and file 5500 forms.

Peter, great point - I'm pretty sure that these are in fact annuity contracts with TIAA, rather than custodial accounts.

Belgarath, completely agree with EBECatty and Peter. If allocations were made in excess of what plan provided for, the standard remedy under EPCRS is to demand repayment. The alternative is to amend the plan to provide for the allocations, but both corrections are generally available in theory.

Thanks all.