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jlea

Return of Overpayments under EPCRS

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TPA processed in-service withdrawals not permitted under Plan document. Two in 2005 with small dollars; two in 2008 with small dollars, each of these in-service withdrawals of company match, which are not permitted until P reaches 59 1/2 under Plan doc (and participants too young). One prohibited in-service withdrawal in 2007 with larger dollars ($40K), which was withdrawal of rollover contributions that was prohibited before age 59 1/2 at the time (again, participant too young at the time); the Plan has since been amended to remove the age restriction on rollover contributions.

Outside auditors want an analysis of whether this is a PT, as considering whether to note as PT.

Anyone encountered before? How was it resolved?

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First step of your analysis is what is the relationship of the 5 w/drwl recipients to the plan. Are they disqualified persons?

This page on the IRS website gives some info that you can use as a starting reference point:

http://www.irs.gov/retirement/article/0,,id=163722,00.html

If you're uncertain, you can give us some more particulars on the participants and we can try to guide you thru the analysis.

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I am puzzled.

Who do these auditors want to make the decision as to whether a PT or not? Self determination or self-incrimination seems dangerous.

Who really has such authority, anyhow ? Certainly not the plan Sponsor. That seems like trying and convicting yourself.

Why is it necessary that it be noted ?

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Five bucks says it's a staff level auditor working from a checklist. "Q - did the plan have any corrections? If yes, was it a PT? Do not pass Go, do not think for yourself. Document w/ 1/2 inch of paperwork."

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Guest Sieve

Aren't PTs something that the auditor has to opine on in the audit? If so, why shouldn't they ask the question? Besides, when a participant recieves any distribution that he/she is not entitled to (& here, a portion of the distribution is one to which the employee ws not entitled), wouldn't it technically be an ERISA PT?

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Here, each individuals who received one of the improper withdrawals are just rank and file EEs in a very large corporation that is a sub of a giant corporation. Definitely no facts to suggest anything improper about why or how these EEs got withdrawals. Apparently, the TPA's computer system couldn't code these types of transactions in such a way as to stop the underage withdrawal. Instead, the system had a pop-up box where the individual processing the application was supposed to stop the transaction depending upon the type of dollars being withdrawn and the age of the participant.

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just rank and file EEs

Not "parties in interest" under ERISA. Not "disqualified persons" under IRS Code.

I'd go back to them with a definite sounding "no, it's not a PT" and put the burden on them if they want to argue it at all.

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What about ERISA Section 3(14)(F)?

Could you make that into a declarative statement instead of an interrogatory? "ERISA code section such&such says in part: ... This is relevant to the OP's situation because .... "

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Guest Sieve

Masteff --

Sure. And, it might also be helpful if this time I cite to the correct ERISA section (just a minor detail . . .). :ph34r:

You say that there are no parties in interest under ERISA. However, based on the OP, ERISA Section 3(14)(H)--not (F)--says otherwise (as suggested by K2).

Under ERISA Section 3(14)(H), a party-in-interest includes an employee of an employer whose employees are covered under the plan (even though a rank-and-file employee is not a disqualified person under IRC Section 4975(e)(2)). So, payment by the plan to an employee of the employer sponsoring the plan, if not representing payment of a benefit to that employee, is a prohibited transaction under ERISA Section 406(a)(1)(D).

So, wouldn't each unauthorized in-service payment of a "distribution" to these plan participants give rise to an ERISA PT?

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Here's how I come out on the topic.

(1) No PT under IRC as rank and file EE is not a disqualified person. See IRC 4975(e)(2)(H).

(2) Parsing terms of ERISA 406(a)(1)(D), impermissible payment from plan to EE may arguably constitute a "transfer to . . . party in interest[] of any assets of the plan[.]"

(3) However, by correcting under EPCRS, either

(a) you correct by taking reas steps to have P return overpmt plus interest (and ER makes up any shortfall), in which case plan is returned to status would have been in had the payment never occurred (which is basically the remedy sought if there was a PT) or

(b) you correct by retroactive amendment, in which case the payment was not impermissible.

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Guest Sieve

I don't think a Plan amendment would be necessary to correct, but I still think it's a PT under ERISA and might have to be noted in the audit, and/or on Form 5500, and the employer may want to correct under the DOL's VFCP. Any excise taxes owed to DOL would not be excused by VCP correction.

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But still there is the original question of who makes the analysis as to whether PT or not ?

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Guest Sieve

True. If it's truly an independent audit, isn't that an auditor's determination? Don't they gather the info, and then ask questions to get more info, and then give their opinion? If the employer disagrees, then I guess they'd have to convince the auditors to revise the audit or get another one.

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What type of transaction do you believe this to be that is within the purview of the VFCP?

The description of eligible transactions and corrections does not include a generic "transfer of assets." Instead, in the realm of transfer of assets, the listed transactions are sales and/or purchases of assets. Alternatively, you can correct for the payment of benefits without properly valuing the plan assets on which payment is based.

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Guest Sieve

Frankly, I hadn't looked at VFCP before posting, so I didn't know if any correction fit or not. Still haven't reviewd VFCP but, based on your post, there isn't an appropriate correction. So, the normal PT correction process would apploy--undo the transaction.

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And, here, the correction will be to amend the plan retroactively. Then the transaction was not impermissible. Instead, it was a permissible payment of benefits to a plan participant: hence, no PT.

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