Tax ERISA Thoughts

While it is often preferred to leave (certain) administrative procedures outside the plan document, in my experience advising clients on claims, litigation, and related matters, it may be most protective of the plan sponsor to have certain administrative procedures set forth in the plan document if they involve areas that may be challenged by participants (or others) in the future. That of course assumes that the client/plan sponsor intends to follow the terms of the plan and not make "administrative exceptions" in response to requests by more senior executives. From the plan sponsor's perspective, addressing a claim involving, e.g., a hardship distribution, with reference to specific plan provisions (as opposed to some non-disclosed administrative procedure) will more often than not provide the necessary support for actions taken (if consistent with plan provisions). Reference in the plan document will also result in disclosure in the SPD so that participants (and others to whom the SPD is provided) will be on notice of how the plan is to be operated regarding hardship distributions.

While the preferred approach is to obviously have the plan reimburse the employer (perhaps with an interest/earnings adjustment as soon as possible), technically you may have a prohibited transaction (e.g., a loan by the employer to the plan, i.e., fiduciaries utilizing employer assets for plan obligations). The employer may need to consider filing an IRS Form 5330 (Return of Excise Taxes Related to Employee Benefit Plans) and possibly a DOL Voluntary Fiduciary Correction filing depending on the underlying facts). Many employers/plan sponsors will likely choose to make the plan reimbursement (no harm/no foul) without a filing and take the position that the IRS/DOL will not pursue if no loss in benefits/harm to participants or the ultimate amount of plan assets; others may treat as simply an "administrative error." Other considerations may include, e.g., possible violation of any reps and warranties in sale agreements or other financial commitments (if a prohibited transaction). Also, Form 5500 (under penalties of perjury) has a line asking whether there have been any prohibited transactions during the year; also, the independent auditors for the plan (if the plan size requires an independent audit) may flag the corrective transfer in their opinion.

While the preferred approach is to obviously transfer the assets back to the appropriate plan/trust with an interest/earnings adjustment as soon as possible (and should be done in any event), technically you may have a prohibited transaction (employer and/or fiduciaries utilizing plan A assets for plan B obligations). The employer may need to consider filing an IRS Form 5330 (Return of Excise Taxes Related to Employee Benefit Plans) and possibly a DOL Voluntary Fiduciary Correction Filing (benefit payments based on improper valuation of plan assets, depending on the underlying facts). Many employers/plan sponsors will likely choose to make the adjustment (no harm/no foul) without a filing and take the position that the IRS/DOL will not pursue if no loss in benefits/harm to participants or the ultimate amount of plan assets; others may treat as simply an "administrative error." Other considerations may include, e.g., possible violation of any reps and warranties in sale agreements or other financial commitments (if a prohibited transaction). Also, Form 5500 (under penalties of perjury) has a line asking whether there have been any prohibited transactions during the year; also, the independent auditors for the plan(s) may flag the corrective transfer in their opinion.