We have an upcoming payroll audit. We know for a fact that the employer is over contributing to the plan due to an error in their software. We are torn on how to approach this problem. Here are some of our thoughts.

1) We find 100% of the errors.

2) We make the board aware of the problem and ask them to define materiality or direct us as to what to do.

Any thoughts out there??

I think you should identify 100% of the error and inform the trustees of the potential overpayment. Most plans have a policy that allows repayment of overpaymeents no older than one year old provided that those payments have not been used to provide benefits
(e.g. health and welfare plans). What you should not do is offset any overpayments against any underpayments that you find. They must be treated separately. I do not think materiality is a factor.

The statute addresses the issue of reimbursing mistakenly paid contributions (ERISA Section 403), but it is not mandatory, and many Funds have trust agreement provisions that either restate the statute verbatim or elaborate the procedure for reimbursement.
Here the employer can argue that the overpayment is a mistakenly paid contribution, but the next question is whether it is a mistake of fact or mistake of law. It's probably a mistake of fact, and those are easier to address, but the employer must still make a written request for the reimbursement. The statute lists factors for the trustees regarding whether to honor the request; i.e. mistake of law or fact, timeliness, funded status of the Plan, etc. In answer to your questions: 1. Identify 100% of the error and track for the future. 2. Make Board aware and then advise that the employer must first make a written request for reimbursement before the Board makes any decision on what to do.