contribution in error

Deferrals and match for three payrolls posted to the participants account ( all deposits made timely).  The employer discovered the employee was actually terminated an not eligible for the compensation paid.  The employee returned to compensation to the client. However, he took his distribution from the plan before the incorrect match and deferral could be returned from the account.

Is the correction to request the participant return the overpayment? Vendor will need to modify the 1099R to reflect the overpayment

If the participant does not return the funds, can the deferral and match be excluded from the ADP/ACP Test ( NHCE)? Based on this updated compensation, his match will exceed the match formula.

We are pretty sure the participant will return the funds, but need to figure out plan B in case he does not step forward and correct the error.

The correction is to return the over payment.

14 hours ago, 52626 said:

Is the correction to request the participant return the overpayment?

Yes, the plan corrects by requesting the repayment and informing the participant that the excess amount did not qualify for rollover. Can be done in same letter. You don't have to actually get the funds back, just request and take other reasonable measures to get the funds returned, which depends on the amount involved and other factors. Of course, if you don't get the funds back and the money would have been allocated to other participants, the employer needs to recontribute that amount, but that may not be your case.

15 hours ago, 52626 said:

If the participant does not return the funds, can the deferral and match be excluded from the ADP/ACP Test ( NHCE)?

Maybe someone else knows the answer, but I'm not sure I recall this being addressed in the EPCRS Rev. Proc. I would think you could still exclude from testing, but would need to check. Again, maybe someone else knows.

15 hours ago, 52626 said:

Vendor will need to modify the 1099R to reflect the overpayment

If the distribution was in 2022 and the money is repaid in 2022, I guess you would issue a corrected 1099-R without the amount. But if the repayment is in 2023 or a later year, I don't think you would. This subject has been covered many times in other BenefitsLink posts. Take a look at Rev. Rul. 2002-84, 52626, which you can Google.