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? 

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk 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 and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  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.

Highlights of the Discussion

The circumstances under which a contribution can be returned timely 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,[2] 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 there under) 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.

Before correcting an excess contribution to a retirement plan, plan officials should consider all available correction methods, including those outlined in the IRS’s Employee Plans Compliance Resolution System found in Revenue Procedure 2019-19.

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.

[1] Within six months for a multiemployer plan

[2] Revenue Ruling 91-4 Internal Revenue Service 1991-1 C. B. 57

Section 401.-Qualified Pension, Profit-sharing and Stock Bonus Plans

26 CFR 1.401-2: Impossibility of diversion under the trust instrument.

Reversions; remedial amendments. Circumstances under which reversions of employer contributions to a quali­fied plan are discussed. Rev. Rul. 77-200 superseded and Rev. Rul. 60-276 obsoleted.

Rev. Rul. 91-4

PURPOSE

The purpose of this revenue ruling is to obsolete Rev. Rul. 60-276, 1960-1 C.B. 150, and to supersede Rev. Rul. 77-200, 1977-1 C.B. 98, for reversions occurring on or after December 22, 1987, the date of enact­ment of section 9343 of the Omnibus Budget Reconciliation Act of 1987 (“OBRA 87”), Pub. L. 100-203.

ISSUE

Under what circumstances may a qualified pension, profit-sharing or stock bonus plan permit reversion of employer contributions?

FACTS

A plan permits reversion of em­ployer contributions under the condi­tions described in section 403(c)(2) of the Employee Retirement Income Se­curity Act of 1974 (“ERISA”), Pub. L. 93-406, as amended by section 9343(c) of OBRA 87.

LAW AND ANALYSIS

Section 401(a)(2) of the Internal Revenue Code of 1986 generally re­quires a trust instrument forming part of a pension, profit-sharing or stock bonus plan to prohibit the diversion of corpus or income for purposes other than the exclusive benefit of the employees or their beneficiaries. Sec­tion 403(c)(1) of ERISA contains a similar prohibition against diversion of the assets of a plan.

Section 403(c)(2) of ERISA, for which there is no parallel provision in the Internal Revenue Code, generally provided, prior to its amendment by OBRA 87, that the general prohibi­tion against diversion does not pre­clude the return of a contribution made by an employer to a plan if: (1) the contribution is made by reason of a mistake of fact (section 403(c)(2)(A); (2) the contribution is conditioned on qualification of the plan under the Internal Revenue Code and the plan does not so qualify (section 403(c)(2)(B)); or (3) the con­tribution is conditioned on its deduct­ibility under section 404 of the Code (section 403(c)(2)(C)). The return to the employer of the amount involved must generally be made within one year of the mistaken payment of the contribution, the date of denial of qualification, or disallowance of the deduction.In Rev. Rul. 60-276, the Service held that a provision permitting the reversion of the entire assets of a plan on the failure of the plan to qualify initially under the Code would be allowed. In Rev. Rul. 77-200, the Service held that plan language pro­viding for the return of employer contributions under the circumstances specified in section 403(c)(2)(A) and (C) of ERISA could also be included in a plan intended to qualify under the Internal Revenue Code.

The Tax Court, in Calfee, Halter, & Griswold v. Commissioner, 88 T.C. 641 (1987), held that a plan may qualify under section 401(a) of the Code if it permits reversions under pre-OBRA 87 section 403(c)(2)(B) of ERISA, even if such reversions are not limited to initial qualification of a plan. In reaching this conclusion, the Tax Court assumed that the standards and guidelines in Title I of ERISA were applicable in interpreting the Code.In enacting section 9343 of OBRA 87, Congress legislatively overturned the holding in Calfee, Halter, & Gris­wold. It amended section 403(c)(2)(B) of ERISA to provide for the return of employer contributions under that section only if: (1) the return of the contribution is conditioned on initial qualification of the plan; (2) the plan received an adverse determination with respect to its initial qualification; and (3) the application for determina­tion is made within the time pre­scribed by law for filing the employ­er’s return for the taxable year in which such plan was adopted, or such later date as the Secretary of the Treasury may prescribe. Section 9343 also provided that, except to the ex­tent provided by the Code or the Secretary of the Treasury, Titles I and IV of ERISA are not applicable to interpreting the Code. Both amendments were effective on the date of enactment of OBRA 87, De­cember 22, 1987.

Section 1.401(b)-1 of the Income Tax Regulations provides a remedial amendment period for disqualifying provisions. Any such section 401(b) remedial amendment period is a later date as the Secretary may prescribe for filing the application for determi­nation.

HOLDING

Pursuant to this revenue ruling, language providing for a return of contributions in the circumstances specified in section 403(c)(2)(A), (B) and (C) of ERISA, as amended by OBRA 87, may be included in a plan intended to qualify under the Internal Revenue Code. Thus, plans that are amended to include such language will not fail to satisfy section 401(a)(2) of the Code solely as the result of such an amendment. For example, a plan provision permitting the reversion of the entire assets of the plan on the failure of the plan to qualify initially under the Internal Revenue Code will be allowed only under the circumstances described in section 403(c)(2)(B) of ERISA.The determination of whether a reversion due to a mistake of fact or the disallowance of a deduction with respect to a contribution that was conditioned on its deductibility is made under circumstances specified in section 403(c)(2)(A) and (C) of ERISA, and therefore will not ad­versely affect the qualification of an existing plan, will continue to be made on a case by case basis. In general, such reversions will be per­missible only if the surrounding facts and circumstances indicate that the contribution of the amount that sub­sequently reverts to the employer is attributable to a good faith mistake of fact, or in the case of the disallow­ance of the deduction, a good faith mistake in determining the deductibil­ity of the contribution. A reversion under such circumstances will not be treated as a forfeiture in violation of section 411 (a) of the Code, even if the resulting adjustment is made to the account of a participant that is partly or entirely non-forfeitable.

The maximum amount that may be returned to the employer in the case of a mistake of fact or the disallow­ance of a deduction is the excess of (1) the amount contributed, over, as relevant, (2) (A) the amount that would have been contributed had no mistake of fact occurred, or (B) the amount that would have been con­tributed had the contribution been limited to the amount that is deduct­ible after any disallowance by the Service. Earnings attributable to the excess contribution may not be re­turned to the employer, but losses attributable thereto must reduce the amount to be so returned. Further­more, if the withdrawal of the amount attributable to the mistaken or nondeductible contribution would cause the balance of the individual account of any participant to be reduced to less than the balance which would have been in the account had the mistaken or nondeductible amount not been contributed, then the amount to be returned to the employer must be limited so as to avoid such reduction. In the case of a reversion due to initial disqualifica­tion of a plan, the entire assets of the plan attributable to employer contri­butions may be returned to the em­ployer.

EFFECTIVE DATEPlans have until the end of the section 401(b) remedial amendment period to be amended retroactively to conform with OBRA 87. Operation of a plan in a manner inconsistent with section 403(c)(2)(B) of ERISA, as amended by section 9343 of OBRA 87, on or after December 22, 1987, the effective date of section 9343, will cause the plan to fail to satisfy sec­tion 401 (a) of the Code.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 60-276 is obsoleted. Rev. Rul. 77-200 is superseded for rever­sions of employer contributions ocurring on or after the date of enact­ment of section 9343 of OBRA 87.