401k contributions continue after participant's death

Participant (NHCE) passed away in mid 2022 but the company payroll dept continued to send her regular 401k amount for deposit into the mutual fund account.  It wasn't withheld from any pay; it just kept coming out of the company bank account, along with the match.  This went on for over a year, spread across 2 plan years.  Roughly $10,000 in 401k and $8,000 in SHMatch was deposited that should not have been.

The deceased participant's account (100% vested) was paid out to the beneficiary, including these excess 401k and match amounts.

Is the only course of action to go back to the beneficiary to reclaim these amounts?  The plan sponsor is reluctant to push too hard from the beneficiary but there is no other way, correct?  If the beneficiary does not pay it back and the plan sponsor does not pursue it further, is there an amount the plan sponsor owes to the plan to make up for these excess amounts?

Thank you

I think I should have added to the initial post, for at least the SHMatch, would the plan sponsor be able to tap into the forfeiture account (there are non-vested assets from other money sources) to use as an offset to the ~$8000 extra match that was deposited/paid out to the deceased participant?  Since the excess 401k contributions were also coming from plan sponsor account, could the forfeiture $$$ be used to also offset future SHM contributions?

Read ERISA § 206(h), 29 U.S.C. § 1056(h)

http://uscode.house.gov/view.xhtml?req=(title:29%20section:1056%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1056)&f=treesort&edition=prelim&num=0&jumpTo=true

Read Internal Revenue Code of 1986 (26 U.S.C.) § 414(aa)

http://uscode.house.gov/view.xhtml?req=(title:26%20section:414%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section414)&f=treesort&edition=prelim&num=0&jumpTo=true

One or more of the plan’s fiduciaries might want advice about:

whether the failure was inadvertent;

whether the participant’s survivor was culpable;

whether some portion of the unprovided allocations was contrary to an IRC § 415 limit; and

whether a loyal, prudent, and impartial fiduciary might make an informed and thoughtfully considered decision not to recoup some portion of the overpayment.

Isn't anyone else interested to know why a 401(k) deferral was coming from a company bank account and not through payroll withholding? 

jsample, that's the tip of the iceberg. 

• No one reconciled W2s to deferrals. 
• No one reconciled match to deposits. 
• No one noticed current contribution amounts to a deceased participant. 
• The tax return for the business likely is messed up with invalid deductions.

Where was the recordkeeper? the bookkeeper? the tax preparer?

Recordkeeper should be notified of the impermissable allocations and asked to revise 1099-R to not include basis allocated, and to reclassify any distribution of gains.  Beneficiary should be issued 1099-MISC for each year from Sponsor for basis amount if they do not intend to request return of overpayment.  If any forfeitures were used to make safe harbor allocation, those amounts should be deposited back to the forfeiture account by the Sponsor.

Obviously, the amounts that violated the 415 limit, as CBZeller points out, did not qualify for rollover. This is probably everything following the date of the participant's death, although depending on payroll practices and where the participant's date of death fell during the pay period there might be a tiny bit around the time of death that qualified. Reporting as taxable to the 401(k) account beneficiary, as suggested by Nate S, may be all that's required for compliance, but if the 401(k) beneficiary is not the same, or 100% the same, as the individual(s) who would have received a bonus payment due the participant at the time of participant's death, there may be some dispute as to whom the money belongs. I would probably put in a letter to the 401(k) beneficiary that they may want to consult with the decedent's executor or administrator. There's actually an interesting question here as to who should get the 1099-MISC, depending on who actually winds up with the funds, but you probably want to stay out of that. And actually, this may be the rare case where taking back the money as an erroneous contribution (if the beneficiary will part with it) might actually be the simplest solution.

The plan did not have a TPA and handled everything in house.  And the person who was responsible for everything, most notably the bi-weekly employee/match contribution deposits, was the individual who passed away.  Ongoing deposits after her death continued for everyone just fine.  But unfortunately, that included contributions on her behalf, which were just coming from the employer account and not being reconciled with the bi-weekly payroll withholding and match.  By the time someone was permanently assigned to this role, it took some time for them to realize the mistake.

The mistake is somewhat easy to understand.  And now I was told that the money never left the deceased participant's account.  It is still held in the plan.  Which should make things easier to resolve.

I think the easiest solution is to have the excess money moved to the forfeiture account and use to offset future employer contributions.  Do you see any problem with that?

The plan sponsor would also like to consider whether this could be returned to the plan sponsor as a Mistake of Fact ("MOF") contribution.  That seems...a little more involved.  I have not been involved with any MOF $$$ returning to the contribution.  Would anyone recommend pursuing this course of action?  The threshold to meet a MOF return to the employer is a pretty high bar and from what I've researched, even though was a literal mistake having the $$$ deposited, I do not think it meets the MOF requirements.

Thank  you

Put the match, adjusted for +/- earnings, into forfeiture and offset future match contributions until used up.  Remove the unintended deferral, also adjusted for +/-, and refund to the employer as mistake of fact.  The mistake was calculating the deferral as a positive amount.  The fact is that it should have been zero.  Not even a question, clear mistake of fact, not an ounce of discretionary consideration regarding the deferrals.