The third party administrator of a 401(k) plan had a system error such that participants were overpaid benefit payments. In order to correct their mistake, the third party administrator agreed to make a contribution to the plan equal to the overpayments (rather than settle their mistake with the plan sponsor outside of the plan). I think this is definitely an operational error because I don't think a non-participating employer of the Plan can make employer contributions to the plan. Practically speaking, though I think the correction would be for the contribution made by the 3rd party administrator be pulled out and the employer to put that money back in. I guess in the end, the result is no net difference. So, maybe no corrective action is required? Any thoughts on other correction ideas? Also, would there be any prohibited transaction issue with the third party administrator having made a contribution to the Plan, rather than the employer?
FWIW To summarize: the TPA took out money by mistake and put it back. I would leave it alone at this point.
Maybe the contribution by the TPA was the 'correction' of a prohibited transaction--the use of Plan assets by party-in-interest, the participants to the extent that they were overpaid. The TPA was perhaps acting on their behalf in making the corrective payment. Maybe that's a stretch. Off the top, I do not know if the corrective action has to be taken by the party-in-interest, or could be made by someone (here the TPA) for the party-in-interest's benefit.
Next time there is an overpayment, instead of the TPA making up the overpayment the plan might consider reporting such as prohibited transactions on its Form 5500, and notifying each of the overpaid participants that if he or she promptly returns the overpayment (i.e. correct the prohibited transaction) such as within 30 days, the TPA will prepare the Form 5330 and pay the penalty for them. If not, the overpaid participant is on his or her own with respect to the prohibited transaction issue, but that the plan is reporting it to the IRS as part of its Form 5500 annual report.
Next time there is an overpayment, instead of the TPA making up the overpayment the plan might consider reporting such as prohibited transactions on its Form 5500, and notifying each of the overpaid participants that if he or she promptly returns the overpayment (i.e. correct the prohibited transaction) such as within 30 days, the TPA will prepare the Form 5330 and pay the penalty for them. If not, the overpaid participant is on his or her own with respect to the prohibited transaction issue, but that the plan is reporting it to the IRS as part of its Form 5500 annual report.
If there is an auditor involved, perhaps the TPA and PA should be proactive in "confessing"; prove that no one is trying to hide anything?
What are you referring to in, "pay the penalty for them" ?
John,
That's an interesting approach. But, since you are talking IRS, shouldn't you be looking at disqualified persons instead of party-in-interest? I don't see former employee listed as a category of disqualified persons.
Rev. Proc. 2008-50 has a correction method for overpayments. It sounds like that may be how the TPA is correcting the overpayment failure.
That's an interesting approach. But, since you are talking IRS, shouldn't you be looking at disqualified persons instead of party-in-interest? I don't see former employee listed as a category of disqualified persons.
Rev. Proc. 2008-50 has a correction method for overpayments. It sounds like that may be how the TPA is correcting the overpayment failure.
QUOTE
Section 6.06(3) Correction of Overpayment failures. An Overpayment from a defined benefit plan is corrected in accordance with the rules in section 2.04(1) of Appendix B. An Overpayment from a defined contribution plan is corrected in accordance with the Return of Overpayment method set forth in this paragraph. Under this method, the employer takes reasonable steps to have the Overpayment, plus appropriate interest from the date of the distribution to the date of the repayment, returned by the participant or beneficiary to the plan. To the extent the amount returned to a defined contribution plan is less than the Overpayment adjusted for earnings at the plan's earnings rate, then the employer or another person must contribute the difference to the plan. The Overpayment, adjusted for earnings at the plan's earnings rate to the date of the repayment, is to be placed in an unallocated account, as described in section 6.06(2), to be used to reduce employer contributions (other than elective deferrals) in the current year and succeeding year(s) (or if the amount would have been allocated to other eligible employees who were in the plan for the year of the failure if the failure had not occurred, then that amount is reallocated to the other eligible employees in accordance with the plan's allocation formula). In addition, the employer must notify the employee that the Overpayment was not eligible for favorable tax treatment accorded to distributions from Qualified Plans (and, specifically, was not eligible for tax-free rollover).
QUOTE (Kevin C @ Oct 16 2009, 01:12 PM) 
John,
That's an interesting approach. But, since you are talking IRS, shouldn't you be looking at disqualified persons instead of party-in-interest? I don't see former employee listed as a category of disqualified persons. * * * * *
That's an interesting approach. But, since you are talking IRS, shouldn't you be looking at disqualified persons instead of party-in-interest? I don't see former employee listed as a category of disqualified persons. * * * * *
Employees, as such, are as you note not 'disqualified persons', but if the plan investments are participant-directed (and that is an assumption), then they can be disqualified persons with respect to the plan.
John,
It's Friday afternoon, so I may be a little slow. How is the participant a disqualified person if the account is self directed? I thought participants were not fiduciaries by virtue of directing the investment of their own account? (2550.404c-1(a)(1) & (2))
It's Friday afternoon, so I may be a little slow. How is the participant a disqualified person if the account is self directed? I thought participants were not fiduciaries by virtue of directing the investment of their own account? (2550.404c-1(a)(1) & (2))
QUOTE (Kevin C @ Oct 16 2009, 02:49 PM)
John,
It's Friday afternoon, so I may be a little slow. How is the participant a disqualified person if the account is self directed? I thought participants were not fiduciaries by virtue of directing the investment of their own account? (2550.404c-1(a)(1) & (2))
It's Friday afternoon, so I may be a little slow. How is the participant a disqualified person if the account is self directed? I thought participants were not fiduciaries by virtue of directing the investment of their own account? (2550.404c-1(a)(1) & (2))
Look at item #a in this recent post
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