Deferral on Zero Compensation

Employer contributed $10,000 in January, 2022 as a 12/31/2021 elective deferral to the account of the business owner's wife, who is a Participant, but had no compensation in 2021.  Should/can the contribution, adjusted for earnings/losses be returned to the employer?  Is there any way the funds can stay in the Plan, if not in the Participant's account?      

If the employer contributed $10,000 to the plan and did not subtract that amount from any participant’s wages (and has not recorded the amount as at least a conditional debit against the participant’s earned income), shouldn’t the contribution remain in the plan’s assets unless the plan’s administrator finds the employer paid the contribution because of the employer’s or plan administrator’s mistake of fact?

If the contribution remains in the plan (and is not an elective deferral credited to a particular participant’s account), what are the plan’s provisions for allocating such a contribution among participants’ accounts?

Might the participant have been (for 2021) a partner, member, or other self-employed individual?

If so, might she have earned income for 2021?

Might her 2021 earned income yet be undetermined because the partnership’s, disregarded entity’s, or proprietorship’s 2021 income tax return is not yet completed?

If treating this participant as a self-employed individual does not explain the situation, what do BenefitsLink neighbors think about whether mistake-of-fact allows the plan to return the employer’s money?

Is it believable that an employer in January 2022 did not know that it had not paid its employee wages in 2021?

If an amount is restored to the employer on an ERISA § 403(c) mistake of fact, a typical plan document provides that a gain attributable to the mistaken-contribution amount is not returned to the employer. Or a loss attributable to the mistaken-contribution amount reduces the amount to be returned. See Rev. Rul. 91-4, 1991-1 C.B. 57.

Well you either have a $10,000 employer contribution to the Plan to be allocated under the terms of the plan to eligible participants, or as Peter points out you may have a 415 excess refund to pay out.

I would not assume an IRC § 415(c) excess. Rather, if no annual addition was credited to the individual account of the zero-compensation participant, there is no § 415(c) excess.

If the $10,000 (with other 2021 nonelective contributions, if any) is allocated among eligible participants proportionately by 2021 compensation, there would be no annual addition credited to the zero-compensation participant’s individual account.

If the plan restores to the employer the $10,000 (or $10,000 adjusted for loss), there might be no contribution, and so no annual addition credited to the zero-compensation participant’s individual account.

Lou S., what do you think: Is it believable that an employer in January 2022 did not know that it had not paid its employee wages in 2021?

How much room is there to interpret what the employer did as a mistake of fact?

The only scenario I can think of is where the employee is self employed and did not realize they had $0 compensation or a loss until they later did there taxes. In which case you "probably" do have a 415 excess that can be refunded with earnings. There may be others but not any that come to mind.

Otherwise I think you have an employer contribution to allocate to other members.

That said since it was deposited in January of 2022, it doesn't necessarily have to be allocated as 2021 employer contribution assuming it isn't deducted for 2021 and perhaps it could be used to fund 2022 contribution obligations.

I assume its a calendar plan.

Thanks for these comments, Peter and Lou.  I will look further into the circumstances here, including whether there may be cause to treat this as a mistake of fact.

23 hours ago, Peter Gulia said:

Is it believable that an employer in January 2022 did not know that it had not paid its employee wages in 2021?

Especially when said employee is the owner's spouse.  

It doesn't appear that the funds can be returned to the employer under mistake of fact.  I think it appropriate to treat the contribution as an excess 415(c) amount, since the 415 limit is the lesser of (i) $58,000 (in 2021) or (ii) 100% of the Participant's compensation, which was zero.  The Participant will forfeit the amount contributed and it will be transferred to an unallocated account under the Plan to be used to reduce employer contributions in the current year and, if applicable, subsequent years.