Contributions to a qualified retirement plan are generally irrevocable. However, in specific instances, contributions may be returned to the Employer if there is a mistake of fact contribution. While the IRS has not explicitly defined a mistake of fact contribution, it is different than a non-deductible contribution. Generally, a mistake of fact reversion is only allowed if there is a disallowance of deduction. Alternatively, it has been suggested by the IRS that only mathematical or typographical errors can be considered.
If there is a mistake of fact contribution, the contribution must be returned to the Employer within 12 months of the mistake. Earnings on the contribution are ignored in the reversion, but losses must be recognized. In the case of a DB Plan making quarterly contributions, if there is a disallowance of deduction of more than $25,000, IRS approval is required.
If the money is stuck in the Plan, and an excess contribution occurs, what are our options if we cannot revert the money to the Employer? One option could be to move the money to a suspense account to be used for future contributions. However, there may be additional tax factors to consider with this transaction.
If you have made an excessive contribution to a retirement plan, or would like to learn more about maximizing deductible contributions, please contact your IAI consultant to discuss the implications.