Recoupment of overpayments

I have a plan where 3 or 4  people were over-funded for profit sharing due to max comp issues, and severance being used.  But of course they closed their account.

I read 4 articles on SECURE 2.0 provisions and each was less clear than the last.  None of them have nuts and bolts examples about what should be done. 

Do I have to ask for the money back?  I can't tell.

Does the Employer have to deposit the overpayment to the plan's forfeiture account?  This would make no difference as the forfeitures are used to offset contributions anyway, but for the same reason it seems like a ridiculous requirement.

The articles all seem to go back a forth between distributions of vested money before they were eligible for a distribution, and paymetns of funds they were never  entitled to, which is what I have here.

Actually the ERISA Outline did a nice job going over it...  Although I do still have these two questions because I cannot tell if S2.0 eliminated them...

Do I have to ask for the money back?  I can't tell.

Does the Employer have to deposit the overpayment to the plan's forfeiture account?  This would make no difference as the forfeitures are used to offset contributions anyway, but for the same reason it seems like a ridiculous requirement.

So, HCEs such that the plan can't just amend via -11g to increase the allocation?  (Was it 415, or just the wrong comp being used for a pro rata allocation?)

S2.0 section 301 added Code 414(aa)(4)

“(4) OBSERVANCE OF BENEFIT LIMITATIONS.—Notwithstanding paragraph (1), a plan to which paragraph (1) applies shall observe any limitations imposed on it by section 401(a)(17) or 415. The plan may enforce such limitations using any method approved by the Secretary for recouping benefits previously paid or allocations previously made in excess of such limitations."

If the issue is the individuals received an allocation formula that incorrectly included compensation in excess of the compensation limit, then the plan should take steps to recoup the excess amounts.

If the allocation of excess amounts affected other participants (e.g., they received less because the total allocation basis was overstated), then these participants need to be made whole.

Given that the individuals are very highly paid and very likely HCEs, and possibly could have been owners, officers or other disqualified persons listed in Code 4975(e)(2), failing to recoup the overpayment can lead to a host of other compliance issues.

yeah one is an HCE who closed their account.  So at a minimum I ask for the funds back, fine.

But what do you think about the sponsor depositing the overpayment to forfeitures and using to offset contributions they are going to fund anyway?  How about this, every time they make a deposit we take the position that's the employer repaying the overpayment.  Explain to me how that doesn't work, I  dare you  .

On 8/18/2024 at 9:22 AM, austin3515 said:

yeah one is an HCE who closed their account.  So at a minimum I ask for the funds back, fine.

But what do you think about the sponsor depositing the overpayment to forfeitures and using to offset contributions they are going to fund anyway?  How about this, every time they make a deposit we take the position that's the employer repaying the overpayment.  Explain to me how that doesn't work, I  dare you  .

If I understand, that will work as long as the employer does not take a deduction for a contribution.(?)

Why woudn't a contribution to the plan be deductible?  I never saw anything in EPCRS say that when you make that deposit to the suspense account it;s not deductible?

16 hours ago, austin3515 said:

Why woudn't a contribution to the plan be deductible?  I never saw anything in EPCRS say that when you make that deposit to the suspense account it;s not deductible?

I think @jsample is referring to an "unallocated suspense account" rather than a forfeiture account.  I don't recall where this is discussed, but I don't think its EPCRS.  If I remember it correctly, the excess is moved to an unallocated suspense account and is not an annual addition.  You then have to use the assets in the unallocated suspense account before you make any further contributions, and they are an annual addition when allocated.  So from a deduction perspective, you can deduct it when allocated, but not when deposited.