Simple 401(k) violation of Exclusive Plan Rule

[Guest J Dennis]

BACKGROUND INFORMATION:

We are the TPA for a client (doctor's office with approx 1 owner and 10 NHCEs) who maintains both a Profit Sharing (no 401(k) feature) and a Money Purchase Plan (both calendar year plans on standardized prototype documents). During 2001 (after 500 hours were accrued by some employees) we inform the doctor of the beauty of EGTRRA and only one plan is required, add a k, etc. etc.) The doctor informs us that he has entered into a business venture that will increase his staff substantially over the next few years and decides he no longer wants the MP plan, however, to leave the PS for a year or two since the new employees won't happen right. We inform the doctor at that time that a contribution will have to be made to the MP plan for 2001, however, no contribution will be required for the PS Plan and properly freeze the MP Plan and merge it into the PS Plan.

During 2002, service provider agreements were signed, meetings were had with the client, contribution calculations have been prepared, valuations completed, discussions were had with the accountant regarding the tax return, 5500 filed, etc, etc.

We then send them a bill.......

It is now December 2002, after not receiving payment, we contact the doctor. The doctor informs us that he will not be paying our bill, since he told us during 2001 that he no longer wanted the MP plan. In addition, he did not fund the MP plan contribution.

THE PROBLEM (other than the obviously missed funding requriement):

To prove to us how much he didn't want the MP and PS plans, he told us that during 2001 he went to his bank and opened up a simple 401(k) to which the employees made deferrals and matches were deposited.

Our advice to the client was to obtain the services of a pension attorney.

With ALL of that being said (even skipping a few items such as the client telling us in that same phone call that he doesn't want the simple anymore and wants the 401(k) PSP instead) how is this fixed? What happens to the deferred contributions made by the employees? Or any other comments are appreciated. As I mentioned previously, they have not paid our bill and we told them to get a pension attorney, so this is strictly for curiousity sake (and threat to others as to what will happen if they do this).

Thanks in advance.

Jill

[rcline46]

First and foremost, send the bill to a collection agency.

Then, do not respond to any questions, refer the supposed client to your attorney.

Do not provide ANYTHING to this person. Send him a letter, certified return receipt detailing services performed, lack of information to you, failure of deposits, whatever, and terminate any future responsibility for him or his plans.

If contacted by anyone in the future for your records, provide them a copy of the letter.

[Guest J Dennis]

rcline,

We have already done as you indicated. The reason I asked the question was more for informational purposes. We are an Actuarial firm who also serves as TPA on a large number of small special design clients. We do no work on Simple plans or SEP plans (since we don't sell product there is nothing for us to do on them). So as detailed as my question was, I'm looking for more general information on the mechanics, penalties, etc. of what happens in this scenario. In addition to satisfying my curiousity, it may also be good to know since the economic climate is still not great and malpractice insurance is bleeding a lot of the doctor groups dry that do not want to sell to hospitals, the smaller clients we work on are not able to afford the larger contributions they have funded in the past and seem to be more susceptible to the "cheaper" alternative of a Simple plan.

Thank you for the response.

Jill