Prefunded 401k deferrals (over contributed)

I would like to find out how others handle this issue.  Let's say that for whatever reason too much money has been deposited into the Deferral source at the end of the Plan year.  Perhaps it was a duplicate payroll submission or an error in the amount submitted.  Let's say that it was definitely not an intentional prefunding.  

Do you simply allow those amounts to stay in the participant's account and be used to reduce the next required 401k deposits?  (I didn't think that this was permitted).    Do you require the employer to allocate as a discretionary contribution? Do you move the funds to a suspense account to be used to reduce a future Employer contribution, but not an employee deferral?  Do you move to suspense and first use to offset any current year receivable of ER contributions?

Thank you

Given those facts, move the funds to a suspense account and use to reduce  any contribution. 

Edit: Accounting for gains/losses.

I disagree, 401king.  From EPCRS re: excess allocations: 6.06(2)  (emphasis mine)

Quote

...[the excess allocation] (adjusted for Earnings) is placed in a separate account that is not allocated on behalf of any participant or beneficiary (an unallocated account) established for the purpose of holding Excess Allocations, adjusted for Earnings, to be used to reduce employer contributions (other than elective deferrals) in the current year or succeeding year. While such amounts remain in the unallocated account, the employer is not permitted to make contributions to the plan other than elective deferrals.

Quote

Excess Allocations that are attributable to elective deferrals or after-tax employee contributions (adjusted for Earnings) must be distributed to the participant.

It depends.  Most of our plans have decent employer contributions, and most of the time we'll be able to shift it over to a different source for the same participant, or perhaps to a different participant if necessary. 

If that doesn't work and it's a small amount I guess we might treat it as being for the next year but that creates a negative accrual/liability and I'd rather not do that...because it is not permitted as per BGs post which came through as I was typing.  (But if it's a deferral-only plan, I will not let it create a scenario where we are allocating a $50 PS contribution across 15 participants who otherwise would not have an account balance!  "Sane" trumps "right" sometimes.)

I agree it depends.  With a relatively small excess amount, you might be able to use it towards deferrals for the next payroll.  1.401(k)-1(a)(3)(iii)(C) says you can't deposit deferrals before the services related to those deferrals are performed.  If they pay in arrears, you might have enough services already performed for the next pay date when the deposit is made that you are not considered to be pre-funding. If it's a significant amount, or if it doesn't get handled the next pay date, it either gets used as an employer contribution (other than a match) for the year of deposit or returned to the employer. 

It seems that about once a year we have a client make the deposit for a payroll twice. In that case, the extra deposit gets returned to the employer.

@BG5150 Interested in your thoughts-  Would you differentiate between an Excess Allocation and Mistake of Fact?

Although the original questioner was not crystal clear as to the reason for the overcontribution, the amounts he is thinking of are apparently not excess deferrals or excess allocations, but rather mistaken deposits by the employer that may not have a direct, or at least appropriate, relationship to the employees' elections. I agree with 401king that on those facts the amounts should be suspensed and then "burned off" for any allocation or expense the plan has to make in the next year. I don't think the amounts are deductible until the next year, but this could be debatable.

This is just one example of the countless little imperfections that arise in 401(k) plans.  Yes the regs say employers cannot pre-fund deferrals. Assuming this was simply a mistaken duplicate deposit that is an isolated incident, I wouldn't characterize it as pre-funding deferrals, but just a mistaken deposit.  Use it to offset the next contribution going into the plan.  Memo to the plan file to document what happened, the resolution and the changes made to avoid it happening again.