401k excess matching of $18

Hi,

Our client had an excess matching of $18 to an employee and couldn't contact with him to resolve this problem. The plan admin proposes the following fix.

"The guiding principle is to make the plan whole. You have three options here:

• Recover the assets from the participant to make the plan whole (let me know if you go this direction and I will provide some assistance with the mechanics)
• Make the plan whole from corporate assets and recover the assets from the participants to make the corporation whole
• Declare this to be a deminimis amount, taking no action to make the plan whole, and take your chances on audit with the IRS/DOL that they agree with you that this amount is deminimis"

We really want to treat this as deminimis since it would be troublesome and not cost effective to resolve such small amount. I just want to find some research or guideline from IRS/DOL to back this deminimis.

I did some research and only found Rev. Proc. 2016–51. section 6.02(5)(b) "(b) Delivery of small benefits. If the total corrective distribution due a participant or beneficiary is $75 or less, the Plan Sponsor is not required to make the corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant or beneficiary would exceed the amount of the distribution. This section 6.02(5)(b) does not apply to corrective contributions. Corrective contributions are required to be made with respect to a participant with an account under the plan." But this only applied to corrective distribution. In this case, the employee owes the plan back $18.

Would some of yall run in to this situation before and have any guideline on this or research regarding how to treat this. ?

Thank you!

Is it safe to assume that in your scenario that the excess $18 matching contribution was paid out of the Plan to the participant?

If the $18 was supposed to be forfeited and the plan doc requires forfeitures to be reallocated as an additional contribution, have the employer kick in another $18 to make the plan whole.

Almost any other scenario, ignore it.  It's not worth $18. 

Well. What we were thinking was

- The company overmatched $18 and the employee already cashed out . So the employee owes the plan $18. 401_noob

- The company couldn't contact him. So as JackS said we think that what if the company go ahead and pay $18 back to the plan and never get reimbursed back $18.

We just want to have some research backing this deminimis. Can the company go ahead and pay back to the plan $18 and call it even.

I wonder if this would be considered an overpayment and would therefor fall under the recovery of small overpayments exception in 6.02(5)(c)?

(c) Recovery of small Overpayments. Generally, if the total amount of an Overpayment to a participant or beneficiary is $100 or less, the Plan Sponsor is not required to seek the return of the Overpayment from the participant or beneficiary. The Plan Sponsor is not required to notify the participant or beneficiary that the 32 Overpayment is not eligible for favorable tax treatment accorded to distributions from the plan (and, specifically, is not eligible for tax-free rollover).

IMHO 401_noob is correct about the amount being so small it can simply be ignore, which makes bullet point #3 a viable option.  However, I would start with bullet point #2, by sending a letter to the person.  Then, let the amount be "absorbed" in a future employer contribution to make the Plan whole.  If you get the $18 back, you reimburse the firm; otherwise, don't lose any sleep. 

I would take this approach since it documents that an attempt to retrieve the money was made, notice was provided to the person, and the Plan was made whole.  Then if your get a really crazy auditor everything is covered and the effort expended was minimal; including the effort needed in the audit.

Or, would it fall under the Small Excess Amounts in 6.02(5)(e) on the very bottom of page 32?

(e) Small Excess Amounts. Generally, if the total amount of an Excess Amount with respect to the benefit of a participant or beneficiary is $100 or less, the Plan Sponsor is not required to distribute or forfeit such Excess Amount. However, if the Excess Amount exceeds a statutory limit, the participant or beneficiary must be notified that the Excess Amount, including any investment gains, is not eligible for favorable tax treatment accorded to distributions from the plan (and, specifically, is not eligible for taxfree rollover). See section 6.06(1) for such notice requirements.

I have had experience with this exact situation under an IRS Audit.  We had sent a letter to the ex-participant about the excess.  The person ignored that letter, so no money came back.  The amount was then "reconciled" into the next years profit sharing contribution.  The auditor said "good" and moved on.  There was no further comment, including with the supervisory review.  I suspect it would have been fine if no action was taken, but why not take the safe route?  It worked in that situation, and yes I know a single IRS audit does not prove anything definitively, it took almost no effort for that extra CYA, so why not?

Smoke? Fire?  Has it been determined that this problem is/is not isolated?  One error could mean other errors.  Just sayin'.

David Rigby, not understanding your response.  I may be dense.

Just suggesting that this ONE error may not be the only error.  If there are others, the source of that problem should be addressed.

16 hours ago, david rigby said:

Just suggesting that this ONE error may not be the only error.  If there are others, the source of that problem should be addressed.

Oh.  I understand now.  Errors like this do tend to come in groups.