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. The advisor asked: “My client made an excess contribution to his 401(k) plan. When can a plan sponsor rescind 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 timely to a plan sponsor are limited under ERISA Sec. 403(c)(2):
The contribution was made because of a mistake of fact provided it is returned to the employer within one year;1
The contribution was made on the condition that the plan is qualified and it is subsequently determined that the plan did not qualify; or
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 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) 91440412:
“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 Private Letter Ruling Number: 9144041 Internal Revenue Service August 9, 1991 Symbol: E:EP:PA
Uniform Issue List No.: 0404.00-00This letter constitutes notice that your request with respect to the above-referenced defined benefit pension plan (Plan C) pursuant to Revenue Ruling 77-200, 1977-1 C.B. 98, for the 1989 plan year has been denied.
In Rev. Rul. 77-200 the Service held that plan language providing for the return of employer contributions under certain limited circumstances may be included in a plan intended to qualify under the Internal Revenue Code. One of those circumstances pertains to situations in which the employer made the contribution by reason of a mistake of fact. Under Rev. Rul. 77-200, the return to the employer of the amount involved must be made within one year of the mistaken payment of the contribution.
Based upon the facts as presented, Plan B merged into Plan A as of April 1, 1989. The new plan is an amendment and restatement of Plan A and was given a new name, Plan C.
In July and October of 1989, the employer made contributions totaling $38,612 to Plan C which exceeded that year's maximum tax-deductible contribution. In October of 1990, the employer submitted a ruling request to the Service pursuant to Rev. Rul. 77-200 requesting that the employer be permitted to take back these contributions because they were made as a mistake of fact.
Section 401(a)(2) of the Internal Revenue Code generally requires that a trust forming part of a pension, profit-sharing, or stock bonus plan prohibit the diversion of corpus or income for purposes other than the exclusive benefit of employees or their beneficiaries.
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.
Notice 89-52, 1989-1 C.B. 692, provides guidance with respect to quarterly estimated payments required by section 412(m) of the Code. Q-16 of Notice 89-52 asks whether all or part of the payment of a quarterly installment may be returned to the employer as a mistake of fact merely because such payment is in excess of the deductible limits. A-16 states that nondeductibility is not a mistake of fact.
Subsequent to the date of the merger (April 1, 1989), and the dates of the aforementioned 1989 contributions, an actuarial valuation was done which showed that the merged plan, Plan C, was fully funded.
No evidence has been provided to the Service that an arithmetical error occurred which caused nondeductible contributions to be made to the plan. The employer simply contributed money to Plan C before a valuation was done. After the contributions were made, an actuarial valuation was done and it was determined that the contributions were nondeductible. This is not a fact pattern which constitutes a mistake of fact. During a telephone conversation with you on May 30, 1991, you were advised of our tentative adverse decision and in accordance with Revenue Procedure 90-4, 1990-1 C.B. 410, were offered a conference to discuss the aforementioned decision. In a letter dated June 25, 1991, we requested that you contact us within 21 days if you wanted to exercise your right to a taxpayer conference. Because we have not heard from you as of the date of this letter, our adverse decision has become final and this ruling letter to that effect is being issued.
A copy of this letter is king sent to the Key District Director in *****.
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