Refund due to participant election error?

We have a participant who intended to make a salary deferral election effective January 2023, but submitted it too soon so it was implemented effective December 2022.  They asked us TODAY to refund it.  I can't find any legal justification for refunding it to them--it was a valid, although premature election; they did not exceed any IRS limits and they have no distributable events.  They are under 59 1/2.  Is there a loophole I am missing?  

Did the form itself indicate its effective date?  Did the employee indicate when submitting the form when it was meant to take effect?  Does the Plan Administrator otherwise enact elections upon receipt?

(Kinda hoping you can find a way that this was an improperly executed/processed form.)

I am unaware of any service provider that has an "effective date" on a deferral election form, and to do so would be an administrative impossibility.  The only delay in implementation that we handle is a delay to an initial eligibility date - if in the future.  I don't see any way to remove the money from the plan.  Easiest answer is to prospectively reduce deferrals until the amount is recouped.

Did the employee already meet the plan's eligibility requirements and had reached an entry date?  If not, then there is good reason to take the deferral away from the employee's account for allowing an ineligible individual to participate.

Does the plan have a provision that deferrals must be effective as of the beginning of the quarter (or month)?  If yes, then there is a good reason to take the deferral away from the employee's account for not following the plan document.

Did the plan administrator suspend deferrals for HCEs in anticipation of a test failure and the employee was an HCE?  This would be a failure to enforce the plan administrator's plan directive.  A tough IRS agent may say the deferral has to be removed from the employee's account and the deferral has to be included in the ADP test.

If the plan essentially said a deferral election is effective as soon as administratively feasible, the plan would have no way to know the employee intended to make the election effective in January and there would be no such thing as an election made "too soon".  In this case, the employee and the plan sponsor need to live with the consequences of their actions (gee, the employee made a deferral!)

Mechanically, you may want to keep the deferral in the plan, let the employer use it as a credit against the next payroll, and let the employer square up with the employee.

Hopefully, there was not a match involved.

No paper form; it is all online.  Not only do we post a link to the payroll cutoff schedule right on the screen where participants make their elections, there is also a field right there for the participant to elect the desired effective date.  They easily could have specified 1/1/2023 or waited until after the cutoff date to submit.  There is no match.  

I guess these posts confirm that there is no legal basis for refunding their contributions, which is what I thought but it is nice to have the confirmation.  I wish I knew why they waited until the last few days of February to report a problem with the December paycheck!  

Lol, they're getting their tax info together and saw it on their w-2!

They had an effective date option and didn't use it, nor did they miss the monies originally, so not sure that they've been harmed in any manner.  The Plan doesn't seem to have done anything wrong, the ppt can elect to change their future deferrals to make it up or not.

It sounds like this is a participant error and the participant has to live with it.

If the fact pattern showed that the participant followed plan procedures (e.g., entered an effective date in 2023) and the plan did not follow those procedures, then the plan could consider treating the 2022 deferral as an Excess Allocation and refund it with earnings under EPCRS 6.06(2).  The nice thing about this correction is the refunded deferral would not be included in any 2022 testing should this amount otherwise have contributed to test issues.

On 2/28/2023 at 9:17 AM, EPCRSGuru said:

No paper form; it is all online.  Not only do we post a link to the payroll cutoff schedule right on the screen where participants make their elections, there is also a field right there for the participant to elect the desired effective date.  They easily could have specified 1/1/2023 or waited until after the cutoff date to submit.  There is no match.  

I guess these posts confirm that there is no legal basis for refunding their contributions, which is what I thought but it is nice to have the confirmation.  I wish I knew why they waited until the last few days of February to report a problem with the December paycheck!  

So I take it the participant did not select any effective date, and the program defaulted to "right now."  Assuming that should have been clear to the participant, I agree it's his error and he has to live with it.  Maybe he'll be more careful with his financial decisions in the future, and this doesn't sound like a major one in any case.