alanm

One thing to consider: section 1563 e(5), I believe, causes stock attribution if the couples have a child under the age of 18.

Without knowing more about the advisor, ie, broker working for a broker dealer, or just an SEC registered advisor etc.; it is hard to say. I will assume it is a broker because you said he got commissions. If you are just a TPA and not a broker dealer, you should let him get his fee independent of you. A broker must get approval of the arrangement by the broker dealer, where his license resides, under rule 3040; with that approval, the checks must go to the registered broker-dealer who pays the broker. By you paying him directly and sending a 1099, indicates that process is being circumvented. By handling advisor money, you are being pulled into the advisor-fiduciary loop and you should avoid that. In any case, detailed disclosure on this arrangement should be made to the sponsor and participants. The proper way is: the plan/sponsor signs an advisory contract with the advisor, the custodian is then ordered by the trustee to pay the fee to the advisor or broker-dealer. You should be out of the loop.

I think either the trustee or the sponsor can make up the loss to the plan for the mistake, depending on the contractual liability. The sponsor can deduct the restitution as a Miscellaneous deduction under section 162. I think this would be considered an insignificant error and IRS notification would not be necessary. The plan could subrogate to the sponsor and the sponsor could go after the recepient in court. The participants should not take the hit for the negligence of the trustee.

I'm sure, if asked nicely, the administrator will provide a calculation and reason why the participant is not due the second distribution. You could then ask an independent actuary if it sounds reasonable. If it is reasonable, why not pay back the money rather than fight. The Administrator is probably afraid that if he doesn't move quickly, the money could be spent and lost. Usually the plan will say if the participant lodges a complaint, the administrator can take up to 90 days to respond with a written explaination; here we have the administrator telling you he made a mistake and he is taking steps to get back plan assets. Surely, a phone conversation about how benefits are calculated can solve this problem.

Pensions in Paradise: YOur quote of DOL FB 2003-3 stopped at the comma; the whole sentence reads: "plans may charge vested separated participant accounts the account's share of reasonable plan expenses, without regard to whether the accounts of active participants are charged such expenses............" I think this has been interpreted by most as meaning you can have a different charge for terminated employees that are participants versus active employee- participants.

Ah! That is the rub. The participant must take 1040 return, corrective measures for the income tax reduction he got for the deferrals in prior years, used to make a top heavy contribution now; but that is up to him, not the plan administrator. Will he do the right thing twice? It is none of my business because no money is coming out of the plan.

Sorry, forgot the cases: A fiduciary-participant's account was allowed to be reallocated to offset an obligation in Coar V. Kazimir, 990 F.2d 1413(3rd circuit, 1993) and in Crawford V. La Boucherie Bernard, 5th cir, 1990. In 1997 Congress also amended ERISA section 206(4) to permit this type of offset.

It was regular C corp, only five employees. I don't think the owner declaring bankruptcy, nor the attorney, even considered the top heavy funding issue and didn't list it as a debt. They adopted onto a multiple employer plan that has a trustee and administrator that is independent of this employer. However, the adopting employer is considered a co-fiduciary when it comes to generating the funding. The administrator has a duty to get the contribution because one compliance failure by one of the employers in the plan compromises all the adopting employer under section 413c. Therefore, ERISA would dictate an honest effort to get the contribution and the person controlling the money of the co-sponsor, being the key employee in question, is a deemed fiduciary for that reason; really over and above the bankruptcy issue--that has been settled. The fact the administrator missed being listed as a creditor is not a plan operational failure, per se, the regs don't say what steps need to be taken to get the funding, only that there be a honest effort. In the end, it is the right thing to do for this key to give it up and reallocate, it was he that made the decision to not fund but to add to his deferral. The court didn't think his pay and deferral to be unreasonable when approving the payment plan; however, they do not speak for ERISA fiduciary issues. So I think there is a reasonable position to ask for the key to sign off on an allocation of his account and make the multiple employer plan compliant. Forcing reallocation of the key's account is another issue entirely, that is clearly precluded and the account is protected; but if the key/owner/sponsor wants to do the right thing, I don't think the administrator is barred from reaching a settlement in writing and doing it; a threat of a 409 breach lawsuit only helps the key see the light.

Well, I don't think that is the only remedy; but thanks for the advice. I wasn't privy to the bankruptcy filing and suspect the plan's top heavy contribution wasn't listed with the court, which just means it didn't participate in the settlement dictated by the bankuptcy. Neither was the key employees account balance subject to the corporate bankruptcy in the first place, as it is protected. However, I think after the bankruptcy was completed and the company dissolved, the key employee is still left with a fiduciary duty and moral obligation to have not increased his pay in prior years in lieu of funding the top heavy contribution, since he was sole owner and controlled the money. Instead, he used the higher pay to make a deferral into the plan and now is being asked to reallocate his account to take care of the compliance problem. Technically, the bankruptcy court didn't have a problem with his pay nor his deferral. The administrator of the plan could take the position in a possible suit that this co-sponsor violated the exclusive benefit rule; in lieu of that suit, a settlement could be reached to reallocate if the key employee agrees. There are several court cases on the issue, some saying you can, some you can't; so I suspect the administrator will try and get a voluntary settlement and order a reallocation if that can be had.

An adopting employer of a multiple employer plan went bankrupt without funding the 3% top heavy contribution they owed. Can the Administrator of the plan use the account balance of the owner/key to redistribute to the other participants? Does it make a difference if the key agrees to the redistribution?

Buying and holding is far from the sure thing it’s made out to be. It works in a bull market and it works if you invest regularly in drips and drabs. It works in mild bear markets, when declines quickly reverse like in 1987. It may work if you have twenty years to wait for stocks to recover from a half-off sale. Otherwise, it is risky: very risky if you bought high and extremely risky if you are planning to retire and take up golf within the next five to ten years. Nasty bear markets happen every six or seven years. Smaller declines of 10% or less, called corrections, happen about every two years-----some say we are in a correction now. Taken together, the minor and major setbacks have produced losses in thirty-one out of the last one hundred years. Although, statistics are like prisoners under torture: with the proper tools you can get them to confess anything. The bottom line...... if you are in the market you have risk, some can afford it, some can't. As Groucho Marx once said, after mortgaging his house to meet margin calls during the stock market crash in 1929, "I would have lost more, but I ran out of money."

If the 401k plan is participant directed and they can trade freely among all the investment options, the bank stock can be offered to all sources. However, the plan will have to be registed with the SEC with an S8 filing under the 1933 act and with the various states. Also, a disclosure statement must be given to all participants; and employers who sit on the bank board must satisfy the objectivity requirements of DOL IB 94-2; particularly the liquidity problem of trading the stock. The bank plan probably will not get the protection of 404c because the stock is not publicly traded.

Return the deferrals

You must split your contract, having one for the RIA and one for the TPA and make disclosure of the affiliation and all fees including 12b-1 and sub ta fees--down to the participant level if you want 404© to apply. If you have custody of the assets, meaning you trade these funds and go in and get your fees; you have an added problem because an RIA cannot take custody, an exemption applies to a Broker dealer with adequate capital proscribed by rule 206(4) under the 1934 Act. If you are doing the record keeping as a TPA, you can charge a basis point fee and present a fee trading file to the trustee and custodian to get paid. Since you are not giving investment advice, the SEC is not a concern. The TPA can operate a contribution, distribution bank account under CFR 2509.75-8 as a conduit; I have been audited by the DOL on that and passed. However, the RIA will have to pay atttention to the custody issue and to proper disclosure, because they are a fiduciary and cannot funnel business to the affiliated TPA without careful disclosure. But, the basis point fee arrangement can be done. The fact you may have a bank as a named custodian does not exempt the RIA as a deemed custodian if you operate an omnibus account that co-mingles plans or have access to get you fees. That is the SECs view and you can read it at http://sec.gov/divisions/ocie/advltr.htm

seems like these would be in-service distributions and you keep them in the test for four years.