Mistake In Fact Duplicate Deposit

Pooled 401k plan, client deposited the match true up as instructed in Feb 2021 (Jan YE) then forgets he's done that when reporting is finished in November and deposits the full true up again.  I think this could be considered a mistake in fact and returned to the client or held to utilize for the following plan year.  Thoughts?  He's also deposited more than he needs for the 1/31/22 PY deposits though room for PS and I'm thinking he can take out the $11475.67 that was the duplicate 1/31/21 match true up but has to allocate $8300 additional deposited during the year as PS.  Agree?

23 hours ago, AmyETPA said:

Pooled 401k plan, client deposited the match true up as instructed in Feb 2021 (Jan YE) then forgets he's done that when reporting is finished in November and deposits the full true up again.  I think this could be considered a mistake in fact and returned to the client or held to utilize for the following plan year.  Thoughts?  He's also deposited more than he needs for the 1/31/22 PY deposits though room for PS and I'm thinking he can take out the $11475.67 that was the duplicate 1/31/21 match true up but has to allocate $8300 additional deposited during the year as PS.  Agree?

Was it treated as deductible for 1/31/2021?  Then it may have to be reallocated as an additional amount; and if so, the source may be discretionary between match & profit sharing.  If not previously deductible, then it should all be used towards the plan year 1/31/22 allocations.  Only forfeitures and specified suspense transfers may carry forward to future allocation periods. Luckily its a pooled account, any applicable earnings are included for the 1/31/22 balances, and the match vs profit sharing source allocations are just bookkeeping. 

There should be a section in the plan document addressing mistake of fact contributions.  Generally the contribution must be returned with 1 year.

I see two murky issues here, the “mistake of fact” issue and the “forfeiture suspension” issue.

I urge you to do as much research as possible into the examples of why the IRS has allowed a return of contributions due to a “mistake in fact.” In this case, I do not think (based on my research years ago) that forgetting a fact is a mistake of fact. A mistake of fact would be more in the nature of allocating an amount in reliance upon a W-2 that subsequently was determined to be inaccurate (i.e., there was a correction to the W-2 after the time of the contribution). In this case that you present, however, the employer had all the facts available and could have and should have ascertained whether or not the true-up had already been deposited. The mistake that was made was the failure to confirm that the deposit had already been made. I think the IRS would view the earlier deposit as being a correct fact, and the employer’s only mistake was to forget that correct fact, which the IRS would call a mistake of plan administration. If forgetting facts justified asset reversions, I think many more employers would be forgetting many more inconvenient facts. I have heard stories of unhappy audits involving the defense of having made a “mistake of fact.”

Because this topic is so murky, many plan documents do not attempt to define what is meant by a mistake of fact. When that is so, I suspect it is because the provider believes that the definition of a mistake of fact is that “the IRS knows a mistake of fact when it sees one.” I recommend that counsel be obtained before an employer relies on any plan’s vague “mistake of fact” language. If you see plan language covering this situation, then sure, you can go ahead. I don’t think you will find such language.

Starting with the PPA cycle, the IRS has not allowed provisions in preapproved plans for “forfeiture suspension” accounts. The IRS caused quite a ruckus several years ago when they published an article in their retirement plan practitioner newsletter “reminding” the community that forfeitures cannot be carried forward to future plan years in any discretionary manner for any extended period. It is my understanding that the deadline (by which forfeitures must be disposed of) must now be stated in the document, and so far as I know, the most liberal standard currently permitted is that forfeitures that arise (i.e., are declared) in one year must be disposed of by the end of the subsequent plan year. (I acknowledge that a plan might have suspension accounts, but I suspect that a preapproved plan does not have a forfeiture suspension provision that is longer than I have described.) In fact, that newsletter article, as I recall, was written so as to discourage even the short delay that I have described in this paragraph, but I know of preapproved plan documents that use the short delay described in this paragraph. I had a link to the IRS newsletter but it no longer works. The approximate time of publication was 2015.

A forfeiture is “disposed of” when the employer uses forfeitures for a purpose stated in the plan, e.g., paying expenses, reallocating such amounts, or reducing contributions, etc. Some plans provide flexibility in this regard, others do not. Some plans have ‘ordering” of methods of disposal, and others do not.

Bear in mind there might also be a delay between the time that a termination of employment occurs and the time the resulting forfeitable amount is declared. That period might be as long as a 5-year break in service, depending upon the terms of that document. The time (if any) that a plan provides for disposing of a (declared) forfeiture starts to elapse only after the time period, if any, that elapses between the forfeitable event and the declaration of the forfeiture (which will vary from plan to plan in accordance with the language of the document and, usually, the employer’s elected provisions in that regard.

It is also possible that the plan document does NOT contain the provision that the employer can wait until the end of the year following the year that the forfeiture is treated as arising, in which case the employer should (conservatively) dispose of the forfeiture in the same year that the forfeiture is declared, in which case the subsequent valuation report for the year (normally not done until the year has ended) should reflect the disposal of the forfeitures declared during the year covered by the valuation report.

It might well be that the IRS doesn’t find that short delay for disposing of forfeitures to be objectionable when there is no language in the plan supporting that practice, but I cannot say for sure that that is the case.

I acknowledge that the IRS does not necessarily catch everything that it says it will enforce uniformly for a particular Cycle. As a result, some preapproved plans end up having provisions that were not allowed by the IRS for other provider’s documents. For that reason, if you find preapproved plan language that is more liberal than what I have described, I suspect such language was an oversight by the IRS, and if so, then you should feel free to follow the terms of the document so long as you are confident that the document currently has reliance. You might want to take a look at the subsequent Cycle’s document’s language in this context when the time comes to see if the language changes, as the IRS often notices things in a new cycle that it realizes it should have already noticed in a previous cycle.