Occasionally, mistakes occur processing payroll and 401(k) contributions, which result in incorrect employee 401(k) deferrals or employer contributions being remitted to the 401(k) plan. A certain type of deposit error, considered to be a “mistake of fact,” can be corrected by removing the improperly contributed funds from your 401(k) account. Guideline’s Mistake of Fact Request form may be used by a plan sponsor to request a refund in these situations.
A Mistake of Fact
The Employee Retirement Income Security Act of 1974 (ERISA) and its regulations, which regulate 401(k) plans, forbid the use of plan assets for anything except the exclusive benefit of plan participants and severely restrict the ability to revert plan assets to an employer. Normally, this prohibits money deposited into a plan account from being returned to a plan sponsor or participant. A “mistake of fact” error is considered an exception to this rule.
The IRS has determined mistakes of fact to include mathematical and typographical errors occurring during the contribution process. For example, adding an extra zero to the amount remitted to the trust account for a payroll deferral or including a participant multiple times on the same report would potentially be characterized as a mistake of fact.
Conversely, the IRS has found that there is no mistake of fact where an employer or a participant unintentionally contributes an amount that causes the plan to fail annual testing. This would include exceeding IRS contribution limits for
- Participant deferrals,
- Compensation limits,
- Average Deferral Percentage testing failures,
- Average Contribution Percentage testing failures,
- Top Heavy testing failures,
- or Deductibility limits.
Further, the IRS has found no mistake of fact where a participant selects an unintended deferral rate, contributions are made on ineligible compensation or an ineligible employee is allowed to participate. As they will not allow distributions as a form of correction for testing failures, the IRS has created an alternate system to allow correction for these operational errors as outlined here.