[Federal Register Volume 67, Number 140 (Monday, July 22, 2002)]
[Rules and Regulations]
[Pages 47692-47694]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-18019]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9005]
RIN 1545-BA87


Refund of Mistaken Contributions and Withdrawal Liability 
Payments

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document provides final regulations relating to the 
return of employer contributions or withdrawal liability payments made 
to multiemployer plans due to a mistake of fact or law. Changes to the 
applicable laws were made by the Multiemployer Pension Plan Amendments 
Act of 1980 (MPPAA). The final regulations provide guidance to the 
public in complying with MPPAA. The regulations affect multiemployer 
plans which receive mistaken contributions or withdrawal liability 
payments.

EFFECTIVE DATE: These regulations are effective July 22, 2002.

FOR FURTHER INFORMATION CONTACT: John T. Ricotta at (202) 622-6060 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Section 401(a)(2) 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 employees or their beneficiaries. Section 403(c)(1) of the 
Employee Retirement Income Security Act of 1974 (ERISA), Public Law 93-
406 (88 Stat. 829), contains a parallel rule that prohibits the assets 
of a plan from inuring to the benefit of any employer and that requires 
the plan assets be held for the exclusive purposes of providing 
benefits to plan participants and their beneficiaries and defraying 
reasonable expenses of administering the plan. Under these rules, 
employer contributions to qualified plans were generally not 
refundable. However, a contribution made due to a mistake of

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fact was permitted to be returned to the employer within one year after 
the date of the contribution.
    The Multiemployer Pension Plan Amendments Act of 1980 (Public Law 
96-364, 410(b) (94 Stat. 1208,1308)) amended section 401(a)(2) of the 
Internal Revenue Code to reflect Congressional concern that the 
requirements of prior law for the return of an employer contribution 
were too narrow in the multiemployer context. Under section 401(a)(2), 
as amended, a contribution made to a multiemployer plan due to a 
mistake of fact or law may be returned within six months after the date 
that the plan administrator determines that it was made in error. 
Section 401(a)(2) was also amended by MPPAA to permit the return of any 
withdrawal liability payment determined to be an overpayment made due 
to a mistake of fact or law within six months after that determination.
    The effective date of section 410(b) of MPPAA was January 1, 1975, 
except that in the case of any determination by a plan administrator 
made before September 26, 1980 (the date of enactment), that a past 
contribution was made by of mistake of fact or law was deemed to have 
been made on the date of enactment. Accordingly, the period of time for 
refund of these contributions was 6 months from the date of enactment.
    The IRS published a notice of proposed rulemaking (EE-133-80) in 
the Federal Register on March 11, 1983, (48 FR 10374) to amend the 
Income Tax Regulations (26 CFR part 1) under section 401(a)(2) of the 
Internal Revenue Code of 1954 (Code). At that time, the public was 
invited to comment in writing, or to make a request for public hearing, 
upon issues addressed in the proposals. Eight comments were received, 
but no public hearing was requested.
    The proposed amendment to the regulations would have been numbered 
Sec. 1.401(a)-3. However, in the intervening period of time the IRS has 
changed its system of numbering regulations to more closely align the 
regulation number to the number of the underlying Code section. 
Accordingly, the regulations are being finalized as Sec. 1.401(a)(2)-1.
    After consideration of all comments, the proposed provisions are 
revised and adopted as final regulations under this Treasury decision.

Explanation of Provisions

    In general, the final regulations follow the proposed regulations 
with minor changes described below.
    1. Amount to be refunded. Several comments concerned the amount to 
be refunded to the employer when a determination of mistake is made by 
the plan administrator. Questions were raised relating to the earnings 
and losses attributable to the excess contribution or overpayment of 
withdrawal liability, and the Pension Benefit Guaranty Corporation 
rules regarding the refund of overpayments of withdrawal liability.
    These final regulations provide a narrow exception to the general 
rule that trust assets not be used for, or diverted to, purposes other 
than the exclusive benefit of employees. That the employer may, under 
limited circumstances, receive a refund of a mistaken contribution does 
not detract from the primary purpose of ERISA to protect individual 
pension rights and maintain the solvency and integrity of pension 
funds.
    In general, any earnings attributable to an excess contribution 
shall not be returned to the employer, and any losses attributable to 
an excess contribution must reduce the amount to be returned to the 
employer. As a further limitation on the return of contributions, the 
final regulations provide that a refund of an excess contribution must 
in no event reduce a participant's account balance in a defined 
contribution plan to an amount less than that amount which would 
properly have been in that participant's account had no mistake 
occurred.
    In the case of an overpayment of withdrawal liability, established 
by the plan sponsor under section 4219(c)(2) of ERISA, the plan will 
not fail to satisfy section 401(a)(2) if, in accordance with Pension 
Benefit Guaranty Corporation regulations regarding the overpayment of 
withdrawal liability, the overpayment with interest is returned to the 
employer. (See 29 CFR Ch. XL 4219.31(d)).
    2. Amount to be included in income. In general, the amount of the 
excess contribution or overpayment must be included in gross income by 
the employer if the excess contribution or overpayment resulted in a 
tax benefit in a prior year. Any interest credited or paid on the 
refund of mistaken withdrawal liability payments must also be included 
in gross income by the employer.

Effective Date

    These regulations apply for refunds made after July 22, 2002. 
However, plans and employers may apply the rules of these regulations 
to refunds made prior to that date.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations, and because the 
preceding proposed rule was issued prior to March 29, 1996, the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.

Drafting Information

    The principal author of these regulations is John T. Ricotta, 
Office of the Division Counsel/ Associate Chief Counsel (Tax Exempt/
Government Entities). However, other personnel from the Service and 
Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
an entry to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
Sec. 1.401(a)(2)-1 also issued under Multiemployer Pension Plan 
Amendments Act, Public Law 96-364, 410, (94 Stat. 1208, 1308)(1980). 
* * *


    Par. 2. Section 1.401(a)(2)-1 is added to read as follows:


Sec. 1.401(a)(2)-1  Refund of mistaken employer contributions and 
withdrawal liability payments to multiemployer plans.

    (a) Introduction--(1) In general. Section 401(a)(2) provides that a 
contribution or payment of withdrawal liability made to a multiemployer 
plan due to a mistake of fact or mistake of law can be returned to the 
employer under certain conditions. This section specifies the 
conditions under which an employer's contribution or payment may be 
returned.
    (2) Effective dates. This section applies to refunds made after 
July 22, 2002.
    (b) Conditions for return of contribution--(1) In general. In the 
case of a contribution or a withdrawal liability payment to a 
multiemployer plan which was made because of a mistake of fact or a 
mistake of law, the

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plan will not violate section 401(a)(2) merely because the contribution 
or payment is returned within six months after the date on which the 
plan administrator determines that the contribution or payment was the 
result of a mistake of fact or law. The contribution or payment is 
considered as returned within the required period if the employer 
establishes a right to a refund of the amount mistakenly contributed or 
paid by filing a claim with the plan administrator within six months 
after the date on which the plan administrator determines that a 
mistake did occur. For purposes of this section, plan administrator is 
defined in section 414(g) and the regulations thereunder.
    (2) Applicable conditions--(i) In general. The employer making the 
contribution or withdrawal liability payment to a multiemployer plan 
must demonstrate that an excessive contribution or overpayment has been 
made due to a mistake of fact or law. A mistake of fact or law relating 
to plan qualification under section 401 or to trust exemption under 
section 501 is not considered to be a mistake of fact or law which 
entitles an employer to a refund under this section. For purposes of 
this section, a multiemployer plan is defined in section 414(f) and the 
regulations thereunder.
    (ii) Amount to be returned--(A) General rule. The amount to be 
returned to the employer is the excess of the amount contributed or 
paid over the amount that would have been contributed or paid had no 
mistake been made. This amount is the excess contribution or 
overpayment. Except as provided in paragraph (b)(2)(ii)(B) of this 
section, interest or earnings attributable to an excess contribution 
shall not be returned to the employer, and any losses attributable to 
an excess contribution must reduce the amount returned to the employer. 
For purposes of the previous sentence, the application of plan-wide 
investment experience to the excess contribution would be an acceptable 
method of calculating losses. A refund of a mistaken contribution must 
in no event reduce a participant's account balance in a defined 
contribution plan to an amount less than that amount which would 
properly have been in that participant's account had no mistake 
occurred. Thus, to the extent that the refund of an excess contribution 
would reduce a participant's account balance in a defined contribution 
plan to an amount less than the amount which would properly be in the 
participant's account had no mistake occurred, the return of the excess 
contribution would be prohibited by this section.
    (B) Overpayment of withdrawal liability. In the case of an 
overpayment of withdrawal liability established by the plan sponsor 
under section 4219(c)(2) of ERISA, the plan will not fail to satisfy 
section 401(a)(2) if, in accordance with Pension Benefit Guaranty 
Corporation regulations regarding the overpayments of withdrawal 
liability (29 CFR 4219.31(d)), the overpayment, with interest, is 
returned to the employer.
    (c) Amount refunded includible in employer's income. In general, 
the amount of the excess contribution or overpayment must be included 
in gross income by the employer if the excess contribution or 
overpayment resulted in a tax benefit in a prior year. Any interest 
credited or paid on the refund of mistaken withdrawal liability 
payments must also be included in gross income by the employer.
    (d) Application of section 412. An amount returned under paragraph 
(b)(2)(ii) of this section is charged to the funding standard account 
under section 412 in the year in which the amount is returned.

David A. Mader,
Acting Deputy Commissioner of Internal Revenue.
    Approved: July 10, 2002.
Pamela F. Olson,
Acting Assistant Secretary of the Treasury.
[FR Doc. 02-18019 Filed 7-19-02; 8:45 am]
BILLING CODE 4830-01-P