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Who can deposit funds into a plan?


buckaroo

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Client wants recordkeeper to make a deposit directly into the plan for an error that was made. My understanding is that the recodkeeper cannot make a deposit directly into the plan account. The client is disagreeing.

1) Please confirm that I am correct.

2) Either way, please provide a cite for me to present to the client.

Thank you in advance.

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Many of the key issues suggested by your inquiry turn on which person made the error, and which person or persons might have responsibility and potential liability for the error.

If a service provider reimburses a plan for the plan’s losses without requiring a release of the plan’s claims (and without paying in installments), doing so isn’t a prohibited transaction if the plan hasn’t given away anything.

Or resolving a service error might be provided under the terms of a reasonable service contract that’s exempt under ERISA § 408(b)(2). See ERISA Advisory Opinion 95-26A (Oct. 17, 1995).

If a service provider wants a release (or wants to pay the restoration in installments), Prohibited Transaction Exemption 2003-39 states several conditions that the transactions must meet to exempt the release or an extension of credit in the settlement transactions. 68 Federal Register 75632-75640 (Dec. 31, 2003).

Some of these conditions are meant to show that: (1) there is a genuine controversy; (2) those who act on behalf of the plan aren’t compromised by an interest other than the plan’s best interests; (3) the plan gets a fair recovery; (4) the settlement doesn’t improperly disadvantage the plan or benefit anyone else; and (5) everything is open, written, and kept as plan records.

To meet condition 2, it often is improper or at least imprudent for the plan’s negotiators or approvers to include anyone who was involved concerning the underlying breach, error, or problem (or a subordinate or other person who has an interest concerning such an involved person). To meet condition 1, “an attorney … retained to advise the plan on the claim, and having no relationship to any of the parties, other than the plan, [must] determine[] that there is a genuine controversy involving the plan.” Some law firms (including mine) offer a service in roles 1 or 2.

A restoration payment is not an annual addition. 26 C.F.R. § 1.415©-1(b)(2)(ii)©. For a payment to be restoration, there must be (or have been) a reasonable risk of liability. That potential liability need not be limited to ERISA, but may include other applicable Federal or State law.

If a restoration payment meets all the conditions to be treated as not an annual addition, the Internal Revenue Service usually will concur with a plan administrator’s good-faith treatment of the payment and its uniform allocations as not elective deferrals and not counted in ADP, ACP, or similar non-discrimination testing.

This overview is a bulletin-board pointer among practitioners, and isn’t advice to anyone.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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