The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from California is representative of a common inquiry related to plan errors. The advisor asked:
My client made an excess contribution to his 401(k) plan. A provision in his plan document states: “Any contribution made by the Employer because of a mistake of fact must be returned to the Employer within one year of the contribution.” When can a plan sponsor take back a contribution made to a plan based on a mistake of fact?
Highlights of the Discussion
The circumstances under which a contribution can be returned to a plan sponsor are limited under ERISA Sec. 403(c)(2):
1. The contribution was made because of a mistake of fact provided it is returned to the employer within one year;[1]
2. The contribution was made on the condition that the plan is qualified and it is subsequently determined that the plan did not qualify; or
3. The contribution was made on the condition that it was deductible.
Rev. Rul. 91-4, provides that a qualified pension plan may contain a provision authorizing return of employer contributions made because of a mistake of fact as provided in section 403(c)(2)(A) of ERISA.
Focusing on the meaning of mistake of fact, neither the Internal Revenue Code nor ERISA (or regulations thereunder) define “mistake of fact” for purposes of qualified retirement plans. Through private letter rulings the IRS has revealed it views this exception as “fairly limited.” Consider the following excerpt from IRS Private Letter Ruling (PLR) 9144041:
Mistake of fact is fairly limited. In general, a misplaced decimal point, an incorrectly written check, or an error in doing a calculation are examples of situations that could be construed as constituting a mistake of fact. What an employer presumed or assumed is not a mistake of fact.
Plan sponsors have attempted to zero in on the meaning of mistake of fact through the request of private letter rulings. For example, in PLR 201424032, the IRS concluded that an excess contribution made to the plan based on the incorrect asset value was made because of a mistake of fact. An “erroneous actuarial computation” was a mistake of fact in PLR 201228055. A “mistaken belief about the number of participants and beneficiaries” in the plan constituted a mistake of fact in PLR 201839010.
Conclusion
While it may be permissible to return an excess employer contribution as a result of a mistake of fact, bear in mind, such mistakes are very narrowly defined by the IRS.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2020, Retirement Learning Center, LLC. Used with permission.
[1]Within six months for a multiemployer plan.
