Tax ERISA Thoughts

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.