Client Withheld Too Much 401k

Participant elected to contribute 10% of pay. Whoops, typo, client enters 12% for contribution on payroll.  Very very strict recordkeeper says "OK the correction here is to pay the extra 2% of pay out to the participant as a taxable distribution, code 8, no excise tax, etc."

probably more strict than I would be in this situation but I certainly cannot disagree with them. As far as I know ECPRS has nothing on this kind of an error. Has anyone heard of an alternative way to correct this that would allow the participant to leave the money in the plan?

I have already suggested that the participant can just contribute more in future pay dates to put the money back into the plan. Just curious if there is a way to just leave the money in the plan as is.  

I believe this error would fall under the definition of "excess allocation" of EPCRS.  Distribution of the excess, plus earnings, would be made from the plan. 

Yeah, I guess so.  Thanks!

On 6/5/2020 at 4:34 PM, austin3515 said:

Participant elected to contribute 10% of pay. Whoops, typo, client enters 12% for contribution on payroll.  Very very strict recordkeeper says "OK the correction here is to pay the extra 2% of pay out to the participant as a taxable distribution, code 8, no excise tax, etc."

probably more strict than I would be in this situation but I certainly cannot disagree with them. As far as I know ECPRS has nothing on this kind of an error. Has anyone heard of an alternative way to correct this that would allow the participant to leave the money in the plan?

I have already suggested that the participant can just contribute more in future pay dates to put the money back into the plan. Just curious if there is a way to just leave the money in the plan as is.  

l Are we still in the same year? For how many paychecks was this error made? Would participant accept the 12% for that limited time?  Can the future checks be reduced to 8% for an equivalent number of paychecks if the employee wants to "catch down"?  Sometimes there are practical answers that may not be the absolute same as what the "corrective" rules would expect.  FWIW. 

The employee actually didn;t care at all.  It was the "bundled recordkeeper" who is putting their foot down on the corection.  I got the impression from the CPA auditor I was speaking with that perhaps they would accept a different correction, but only if a hold harmless was obtained.  They haven't said that yet, but I think that's where it would end up.

It should be the employer's decision.  Surely the recordkeeper doesn't claim to have the authority to decide when and to whom distributions should be made.

The corrective methods under the EPCRS usually are not mandatory but are safe harbor methods of correction.  In other words, if one follows the corrective methods, one knows for certain that they suffice, but other reasonable correction methods are possible.  It strikes me as reasonable to conclude that when the only employee affected doesn't care about the correction and there is enough time left in the plan year for he or she to take actions to reverse the impact of the operational failure that doing nothing would be reasonable.

There's a problem though.  For this particular error, it is not clear whether the EPCRS's correction method is merely a safe harbor suggested correction or a mandatory one.  Rev. Proc. 2019-19, Section 6.06(2) (correction of excess allocations) starts with the phrase "in general" which implies that other correction methods are available but it also includes this sentence -- "Excess Allocations that are attributable to elective deferrals or after-tax employee contributions (adjusted for Earnings) must be distributed to the participant."  I would prefer that the client's legal counsel interpret that but if it were me I would say that it is not mandatory, that read in context of the first sentence of the paragraph that it is still the "in general" correction method but not the only one.  Your interpretation may differ.
 

3 hours ago, MWeddell said:

It should be the employer's decision.  Surely the recordkeeper doesn't claim to have the authority to decide when and to whom distributions should be made.

The corrective methods under the EPCRS usually are not mandatory but are safe harbor methods of correction.  In other words, if one follows the corrective methods, one knows for certain that they suffice, but other reasonable correction methods are possible.  It strikes me as reasonable to conclude that when the only employee affected doesn't care about the correction and there is enough time left in the plan year for he or she to take actions to reverse the impact of the operational failure that doing nothing would be reasonable.

There's a problem though.  For this particular error, it is not clear whether the EPCRS's correction method is merely a safe harbor suggested correction or a mandatory one.  Rev. Proc. 2019-19, Section 6.06(2) (correction of excess allocations) starts with the phrase "in general" which implies that other correction methods are available but it also includes this sentence -- "Excess Allocations that are attributable to elective deferrals or after-tax employee contributions (adjusted for Earnings) must be distributed to the participant."  I would prefer that the client's legal counsel interpret that but if it were me I would say that it is not mandatory, that read in context of the first sentence of the paragraph that it is still the "in general" correction method but not the only one.  Your interpretation may differ.
 

Isn't an Excess Allocation a violation of the plan limits or legal limits for deferrals?   Would the wrong amount (an extra couple of percent deferral, but still within the maximums) be subject to this section?  I didn't see a definition for Excess Allocation in the Rev Proc, but there is this definition of Excess Amount:

(3) Excess Amount. The term "Excess Amount" means a contribution or other credit that is made on behalf of a participant or beneficiary to a plan in excess of the maximum amount permitted to be contributed or credited on behalf of the participant or beneficiary under the terms of the plan or that exceeds a limitation on contributions provided in the Code or regulations. The term "Excess Amount" includes any amount in excess of the amount permitted under the requirements of § 402(g), 401(m), or 415. A contribution in excess of the limitation of § 415(c) is not an Excess Amount (or a 403(b) Failure) if that excess is maintained in a separate account in accordance with the rules in the regulations under §§ 403(b) and 415. Such separate account is considered to be a § 403(c) annuity contract (or, if applicable, an amount to which § 61, 83, or 402(b) applies). A contribution in excess of the limitation of § 415(c) that is not maintained in a separate account in accordance with the rules set forth in regulations under §§ 403(b) and 415 is an Excess Amount. Thus, the correction principles in section 6.06 apply.

Larry, the definition of "Excess Allocation" is immediately after the "Excess Amount" definition you quoted.  It's on page 21 of Rev. Proc. 2019-19:

(b) Excess Allocation. The term "Excess Allocation" means an Excess Amount for which the Code or regulations do not provide any corrective mechanism. Excess Allocations include Excess Amounts as defined in section 5.01(3)(a) (i), (ii), (v), and (vi) (except with respect to § 401(m) or 411(a)(3)(G) violations). Excess Allocations must be corrected in accordance with section 6.06(2).
 

I think Larry's question as to whether the deferrals were for 2019 or 2020 is important. If for 2020, I would be willing to say that if the employee sings a contribution form now saying that he or she wants the amount to stay in plan as elective deferrals, that would be correction. If for 2019, you would need to distribute.

1 hour ago, MWeddell said:

Larry, the definition of "Excess Allocation" is immediately after the "Excess Amount" definition you quoted.  It's on page 21 of Rev. Proc. 2019-19:

(b) Excess Allocation. The term "Excess Allocation" means an Excess Amount for which the Code or regulations do not provide any corrective mechanism. Excess Allocations include Excess Amounts as defined in section 5.01(3)(a) (i), (ii), (v), and (vi) (except with respect to § 401(m) or 411(a)(3)(G) violations). Excess Allocations must be corrected in accordance with section 6.06(2).
 

Thank you; I looked several times and just could not find that! Old eyes? And actually, for anyone who cares to check, Excess Allocation is immediately prior to the definition of Excess Amount (they are alphabetical after all) and it's on page 20. I will copy the definition below, but I think it justified what I said: that this error is NOT an excess amount so this fix does not apply.

(a) Excess Amount. The term "Excess Amount" means a Qualification Failure due to a contribution, allocation, or similar credit that is made on behalf of a participant or beneficiary to a plan in excess of the maximum amount permitted to be contributed, allocated, or credited on behalf of the participant or beneficiary under the terms of the plan or that exceeds a limitation on contributions or allocations provided in the Code or regulations. Excess Amounts include: (i) an elective deferral or after-tax employee contribution that is in excess of the maximum contribution under the plan; (ii) an elective deferral or after-tax employee contribution made in excess of the limitation under § 415; (iii) an elective deferral in excess of the limitation of § 402(g); (iv) an excess contribution or excess aggregate contribution under § 401(k) or (m); (v) an elective deferral or after-tax employee contribution that is made with respect to compensation in excess of the limitation of § 401(a)(17); and (vi) any other employer contribution that exceeds a limitation under § 401(m) (but only with respect to the forfeiture of nonvested matching contributions that are excess aggregate contributions), 411(a)(3)(G), or 415, or that is made with respect to compensation in excess of the limitation under § 401(a)(17).

Isn't there a state law issue?  Amounts may only be withheld from pay check per employee's direction.  State labor dept. may require that the excess withholding be restored to the paycheck, if it were somehow to be involved.  I know, the employee doesn't care; but it should be a consideration.

49 minutes ago, FormsRstillmylife said:

Isn't there a state law issue?  Amounts may only be withheld from pay check per employee's direction.  State labor dept. may require that the excess withholding be restored to the paycheck, if it were somehow to be involved.  I know, the employee doesn't care; but it should be a consideration.

If the employee does not care, there is not an issue at law.  State labor laws DO NOT APPLY to ERISA plans; they apply to the employer.