Do 403(b) Plan Sponsors Have to Recover Small Overcontributions?

Q: We sponsor an ERISA 403(b) plan with a 5% annual discretionary employer contribution. When our plan auditor double-checked the contribution for 2022, they discovered that, due to a payroll glitch, we contributed slightly more than 5% to one participant, which, of course violated the terms of our plan document. The overcontribution was only $150, but the employee terminated recently and withdrew her entire account balance from the plan. Do we need to recover the $150 from the employee?

Kimberly Boberg, Taylor Costanzo, Kelly Geloneck and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: Fortunately, no. The procedure for correcting an overpayment has a “de minimis” rule which states that excess overpayments of $250 or less (the limit used to be $100 but was increased to $250 in July of 2021) do not need to be recouped from the participant. This is an important exemption, as the corrective method would generally be to recoup the funds and to treat the portion of the distribution attributable to the excess as ineligible for rollover., If these ineligible amounts were actually rolled over, it would historically have been challenging. Note, however, that SECURE 2.0. contains a provision that helps to mitigate many of the negative impacts for most overpayments.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Amy.Resnick@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future column.