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profit sharing plan termination with leftover funds


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We have a profit sharing plan that was terminated effective 7/1/22.

Most participants rolled over by 12/31/22, the remaining participants, exclusive of the owners were paid out between 1/1/23-5/12/23.

After the owners rollover, there is an excess of roughly $2,500 sitting in the plan master account at Schwab and the client is asking what to do with it.

Usually the excess is paid to the TPA as an administrative expense, but they are complaining because they had paid my fee 12/22; this is the only plan I have that the excess probably will not be paid as an administrative expense.

To whom would the excess be reallocated, those that were paid after 12/31/22 or all participants of the plan that were paid out.

 

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Did your fees that were paid 12/22 include prepayment for the 2023 Form 5500 and final Form 8955-SSA, any distribution processing fees, or 1099Rs?  Are there other service providers that have not yet been paid, or their invoices in 2022 or 2023 were paid by the company and not the plan?

What is the source of the funds in the "plan master account"?  Is it from uncashed checks?  Differences between amounts funded and amounts allocated?  Income variance of sort like amounts received from litigation settlements, or excellent market performance on assets that may not have been sold to cash to make payments?  Unused forfeitures?

If the source is attributable to contributions or forfeitures, there is some logic to using the plan's allocation basis for those sources.  If it is for uncashed checks (or missing participants), then an effort needs to be made to find the payee.  (If that fails, the PBGC has a program available for missing participants in a DC plan termination, and the PBGC will want the cash.) 

If the amount is due to income variances or there is no clear documentation on where the amount came from, then it would make sense to allocate over account balances.  I suggest avoiding any allocation method that is not in the plan document and that skews the amounts towards the owners.  The plan may consider allocating the amount to everyone with a balance in 2023 excluding the owners.  Alternatively, the plan may consider allocating the amount to everyone based on their termination distribution amount.  If this would create a lot of very small checks, then the plan could consider limiting the group to participants that had more an amount that was more than the cost of making the additional distributions.

There also would be the fees involved in taking these steps.

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I obviously did not charge enough, my fee included final 550s, 1099s. Fee paid from PC. Amount left in master account is from investment gain, or so the client says.  No fees ever paid from this account, all participants located, no missing persons.  Looks as though I need to allocate on the basis of amounts distributed - everyone rolled over.  My question is, which participants to receive?  All, including those paid in 2022?  Looks that way

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Did the employer pay plan-administration expenses the employer was not obligated to pay?

If so, might the employer want the plan’s trustee to reimburse the employer?

Would ERISA § 404(a)(1) and the plan’s governing documents permit such a reimbursement?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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No adm fees were ever paid from this account; does appear as though the PC (employer) is expecting to take the money back, but that’s not allowed in a PS plan?

So if we must reallocate, would this be on the accounts of all participants, even those paid out last year???

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Ilene, the plan says to distribute among the participants if not used to pay admin expenses, makes no reference to those that have been paid out vs those who have not.

This leads me to believe all who were participants on the effective date of plan termination must share, whether previously paid in full or not.

I know the client can’t take it back.

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18 hours ago, thepensionmaven said:

Ilene, the plan says to distribute among the participants if not used to pay admin expenses, makes no reference to those that have been paid out vs those who have not.

This leads me to believe all who were participants on the effective date of plan termination must share, whether previously paid in full or not.

I know the client can’t take it back.

Yes it must be distributed to participants, or used for expenses. Who gets it is another matter. If the plan was valued as of a certain date, and a participant(s) were paid immediately thereafter, then I'd argue that they don't share in the gains. If the money was invested and people were getting paid in dribs and drabs, then you have a mess because it wasn't handled properly. We* always quarterback the whole thing - tell clients to move to cash, do an interim val, and pay everyone asap thereafter to avoid this situation. 

*Well, when I was in charge that's what we did. It's a bit more willy-nilly now.

Ed Snyder

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