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Thanks for the replies. I'm sticking to my initial reaction that you just can't do this stuff. Unfortunately, the more I look into things, the more it looks like the prior actuary just wasn't on top of things. I'm seeing a valuation that used a 5% interest rate and the individual aggregate cost method. There are just issues everywhere.

Not much legal guidance has been provided other than what was discussed in Congress at the time the bill was being debated. The following is from the House Report that accompanies the passage of 104-95: (I) Any plan, program, or arrangement described in section 3121(v)(2)(C) of the Code, provided such income is part of a series of substantially equal periodic payments made for the life or life expectancy of the recipient (or for the joint lives or joint life expectancies of the recipient and the designated beneficiary of the recipient) or for a period of not less than 10 years. Payments under such an instrument may not occur less frequently than annually. The periodic payment rule established by subparagraph (I) shall not apply to a plan, program, or arrangement which would, but for sections 401(a)(17) and 415 of the Code, be described in subparagraph A. The effect of subparagraph (I) would be to exclude from State taxation certain amounts of income paid under non-qualified deferred compensation arrangements, that is, plans which are not recognized as ``qualified'' under the tax code. These are unlimited, flexible arrangements without contribution limits, funding requirements, or limits on payout provisions. The availability and use of such arrangements is limited to a small proportion of the work force. Payments made by employers to non-qualified plans are includable in the employee's income in the year in which made, regardless of whether the employee has a right to distribution. Employers often do not fund non- qualified plans, therefore, until they are ready to make actual distributions to the recipients. Subparagraph (I) also protects from State taxation ``excess benefit'' plans that are set up because a qualified plan in a particular instance (1) would exceed the $150,000 ceiling in annual employee compensation that employers may take into account in determining contributions made to or benefits paid from a qualified plan (section 401(a)(17)); or (2) would exceed the present limits on the amount of allowable benefits from a defined benefit plan or the present limits on the amount of allowable contributions to a defined contribution plan (section 415). Defined benefit plans give employees a special benefit at retirement, commonly based on a percentage of the employee's compensation and number of years of service to the employer. The employer will annually contribute an amount that is actually required to fund the benefit at retirement. Defined contribution plans specify the amount of contribution that is to be made annually. This exemption applies without regard to whether the periodic payment requirements of subparagraph (I) are met. Looking at these explanations of the terms, it is clear that you would like your plan to be considered an "excess benefit" plan to take advantage of the exemption. The plan sponsor should confirm whether the plan was designed to be treated as such; based on the description provided, it does not seem to be. The plan sponsor needs to get this right as well as they have the obligation to deduct and remit withholding to the appropriate taxing authority.

If you're worried about later investigations or audits, then often you can get by with keeping good internal records and notes of what happened and when, and what actions were taken to fix it (i.e. firing them and carefully monitoring the new folks). Drop it into a memo or other document, tag the fiduciaries and other important folks as needed (and save the email showing distribution). Include discussion in the memo of what sort of notification to EBSA (or IRS) might be appropriate and why you made the decision to notify or not notify. You might also include discussion of the issue in the minutes for the next meeting by fiduciaries, and any decisions made. Benefits counsel could be very helpful here. Save your documentation in the same place as other important plan information, so future people working on the plan can easily find it. That way, if the plan does get hit with an investigation or some other audit, even if the entire team is new hires and new vendors they can still explain what happened and show how responsible the plan was about it. If everybody's money is correct, and VFCP is not appropriate, and no DOL or IRS reporting needs to be amended, then there might not be any obligation to notify EBSA. Just a contract issue with a bad vendor. You could complain to EBSA, if you think snitching is warranted and want to stop these folks. EBSA allows anonymous complaints. It could throw a bunch of plans into investigations.

My guess is that the transactions are ok (recorded properly) but the reporting is horrible. The alternative is that this RK has bad or no internal controls in its system and treats forfeiture as a earnings, which I really doubt. Bad reporting isn't that uncommon though this seems to be an extreme case. I think this is one of those situations where you roll up your sleeves and really dig into what you have and try to pull it apart and piece together your own "report". There will be times when you will need to go to the former RK for clarification on a transaction, but they should be able to provide that without the need for a new report and hourly charges.

The one thing you don't say is if you think people's balances are actually wrong. I get bad reporting is annoying but if they forf people and reallocated them correctly for example what is the issue in your mind? Maybe the reporting is so bad you can't tell???? If the amounts are wrong I agree there is an issue but not sure what you expect the DOL to do. I guess my thoughts would depend on if you thought people's balances were wrong or just or poorly recorded. My guess is also this is a contract issue not retirement law. A recordkeeper presumably agreed to do a job correctly and failed to do so. That strikes me more as a breach of contract than an ERISA problem. Not the clearest answers.

Threshold question is whether the IC classification was appropriate. If this was a misclassified employee, then the company may have to go back and fix a bunch of stuff and maybe correct how their current contractors are classified or how they are treated. If this was a correctly classified contractor, then presumably the worker-company relationship had some meaningful changes in the changeover (i.e. more than just job title and contract, and not just the employer electing to use 1099). If contractor classification was appropriate, or if you just want to assume it was appropriate and not go looking under rocks, then it's no more meaningful than if this worker was previously a vendor, a consultant, or a seconded employee working onsite. Those folks are not employees either. If they are pushing to give this worker credit for non-employee service, then maybe the company should re-examine their worker classification practices?

If he was really a common law employee for tax purposes all this time, your client has a much bigger plan issue then simply whether he enters the plan now or a year from now.

Thanks for the reminder about this - I think I learned it here on the board a few years ago, and promptly forgot. The instructions to the forms have not caught up.

Trying to understand a bit better... Were these policies tied to a retirement plan for a company your father used to work for? And his former employer no longer exists, nor do the insurance companies that issued the policies? If the policies were part of an old profit sharing retirement plan, its quite possible the plan cashed out the policies and your father was given a distribution ( cash or rollover) of the money if the plan closed down, or he elected a withdrawal either when he stopped working for that company, or reached retirement age. Life insurance policies in retirement plans used to be more popular, but they aren't anymore and over the years I see plans reducing or eliminating the life insurance part of their profit sharing plans.

Absolutely LOVE your quote in your signature!!!