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Found Money after Termination


Briandfox
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A 401(k) Profit Sharing Plan was terminated and paid out over 2-years ago.

The Trustees just received information from the former custodian that they would receive a payment as part of some class action settlement because the Plan was charged "too much."

Questions:

1. How should this money be accounted for? We are thinking it should be paid out to the participants pro-rata (to the extent the charges affected each participant's account balance).

2. A final 5500 filing was already done over 2 years ago. Do we simply do another final 5500 filing in the year of asset recovery?

3. One consideration here is to try to minimize audit risk, will the filing of a final 5500 filing 2 plus years subsequant to the execution of a plan termination amendment and resolution trigger it for audit, or make this an "ongoing plan."

Thanks

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Field Assistance Bulletin 2006-01 (April 19, 2006) includes this:

"[C]ompliance with ERISA’s fiduciary rules generally will require that a fiduciary accept a distribution of settlement proceeds. The Department recognizes, however, that in rare instances the cost attendant to the receipt and distribution of such proceeds may exceed the value of such proceeds to the plan's participants. In such instances, and provided that there is no other permissible use for such proceeds by the plan ([for example], payment of plan administrative expenses), it might be appropriate for a plan fiduciary to not accept the settlement distribution."

Query: If it could be legitimate to refuse the settlement money, might it also be legitimate to accept the money and use it for some other employee-benefits purpose?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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I don't think so, because technically that money is owed to the participants if the settlement encompasses excess fees that were charged to participant accounts.

However, if the distributions to each participant would result in a $0 after accounting for distribution fees, custodial fees, etc... Then it would make sense to refuse the settlement fee.

That, and in this situation if the employer accepted the money (as opposed to the plan), I think it would be taxable as a reversion to the employer (excise tax, etc.)

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If it could be legitimate to refuse the settlement money, might it also be legitimate to accept the money and use it for some other employee-benefits purpose?

Reasonable query. Peter, can you suggest an example where this would be legitimate? What "other EE-benefit purpose" would be acceptable? Are there parameters where the test of legitimacy would clearly fail?

(I'm not asking for free legal advice, just looking for some generalities that can be a discussion basis.)

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Back to the original question.

I can not cite anything for this answer but here is what I would do in most cases.

I would compute the amount the people would receive as you state pro rata based on the final balance payments. If it is cost effective to issue forms and so forth do so and make the payments.

I simply wouldn't file a new Form 5500. The 5500 rules just don't seem to contemplate this kind of fact set. I think the risk of the lack of a form 5500 coming back to bit the plan administrator is small enough to risk.

Obviously, it is a risk and each has to decide what risk they are willing to take but I have helped clients do what I described above before as a TPA.

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