RatherBeGolfing

Many financial companies will not issue third party checks/payment, they will only issue a checks/payment to the trustee. If the plan does not have a checking account with check writing capability, those payments to the trustee are often deposited to the sponsor's operating account Which then issues the payment to the participant. So the plan pays the sponsor who then pays the participant. Usually, the payment to the participant is made as soon as the sponsor gets the assets from the plan. There is no gain to the sponsor in terms of interest or earnings, it is merely a conduit. The alternative is for the plan to open and maintain a checking account which will usually mean fees and/or minimum balances. I see this a lot with pooled plans where there is very little turnover. They might have to process a distribution every 2-3 years.

The "good" news is that even if they wont remove the penalty completely, you could go through the EZ late filer program and pay $500 per plan year. Still stinks but better than $15k

You have to disclose the fee. Most 404a5 questions are answered by FAB 2012-02r. FAB 2012-02r Q1: A plan has both participant-directed and trustee-directed investments. Participants have the right to make investment decisions with respect to the portion of their accounts attributable to employee contributions. The plan's trustee directs the investment of the remainder of their accounts (e.g., employer contributions). Is this plan covered by the regulation? A1: Yes, this plan is a "covered individual account plan" under paragraph (b)(2) of the regulation. This means the plan administrator must comply with the plan-related disclosures in paragraph (c) and the investment-related disclosures in paragraph (d). However, the plan administrator is not required to provide the investment-related information required under paragraph (d) of the regulation for the trustee-directed investments. Rather, the plan administrator's obligation under paragraph (d) is limited to the plan's designated investment alternatives.

Look at FAB 2012-02r, specifically Q29 & Q13 (emphasis mine)

I'm going to get the ball rolling here since we have a lot of issues to get through... What was the AP actually awarded from the plan in the divorce? It sounds like a flat amount of $80K at the time of the divorce, is that correct? Why? If the divorce decree said $80K, where is this percentage and years of marriage coming from? Presented to who? Was it issued issued by a state court and approved by the plan? Or are we talking about a proposed change to the original DRO? Contradictory because of the 2014 date? Its not really clear to me what you mean by determination date of 2014. Going back to 2004 for interest/earnings is what I would expect to see since that was when it was awarded. It makes no sense freeze that benefit for 10 years and then accrue interest from 2014 to now. Why do you think this would be illegal? Approved by who? To be a QDRO it has to be issued by the court and approved by the plan. It sounds like the judge won't issue an order with the "correct percentage" because that was not what the decree awarded to the AP. The DRO can't create a right that was not awarded in the decree, even if you disagree with it.

On a practical level, it still happens all the time with pooled plans. Most of the time its because the financial institution will not issue a third party check so they issue it to the trustee who then issues the check to the participant. With an explanation, I have never had a problem with it on audit.

There are differing opinions in the industry (and here on benefitslink). It has been discussed in detail in this thread While I agree with the ABC & CD method over ABCD method, the unofficial IRS response is that neither method is unreasonable

Of course they know. What is the alternative, tax participants on the fees paid by money they never got?

Sort of... There is a case out of the 9th Circuit (Mack v. Kuckenmeister, 619 F.3d 1010) where the estate of the AP was allowed to receive the benefits. It has been a while since I read it, but it basically goes like this: P and AP agreed to the details of the divorce, with all or a part of Ps 401(k) account going to AP Before the order was signed, P killed AP and shot the Judge APs estate got an an order nunc pro tunc dating the order to a date before the death of the AP. I think the AP is still the AP on the order, but the estate is allowed to collect the benefits on APs behalf. There are a lot of other things going on in this case, but I believe the estate was allowed to collect because they got a retroactive order dating back to when AP was alive. It also gave the state court the SM jurisdiction to decide that a DRO is QDRO. OP is in the 9th Circuit and it sounds like the plan is asking the court to enter an order (state court can determine its order is a QDRO) to pay the benefits to APs estate since AP died after the divorce was final but before a DRO was issued.

Yea I agree. Most auditors I work with would be happy to just make a small note of it and move on (assuming the error was fixed and new controls in place). I have seen much bigger issues barely get a footnote...

That wouldn't surprise me. I posed the original question on one of the linkedin message boards and you squeezed it into the IRS Q&A as the very last question

Which is part of the correction. Your argument is that you don't want to fully correct because it is inconvenient.

This question was asked at the 2013 ASPPA Annual conference. The IRS panel agreed with ASPPAs proposed answer that:

It started as a Philly project and then spread to other regions. The wording of the letters vary a bit, but the common thread is that they want you to correct the fiduciary breach, not just correct the earnings.The Chicago letter is a little more aggressive. Rather than please use the VFCP to correct, this letter says correct or else. But in the end, can you really complain about the DOL telling you to correct an error you haven't corrected?

We still do it this way.

I agree. But we are required to disclose lots of things that really don't make sense to participants. Have you ever seen a participant read the comparative chart for investment performance? It might as well be in Chinese and goes straight in the trash can at most meetings, but somehow it is supposed to help them make informed investment choices... They already have the most of notices prepared, all you need to do is add your fees before distributing to plan sponsor/participants. Depending on your fee structure, it could be something fairly simple like: A base of $X plus $Y per participant, deducted from participant accounts based on the relative size of each account (pro rata) unless the Plan Sponsor elects, at its own discretion, to pay for some or all of the Plan's administrative service expenses through non-Plan assets.

If you want to comply with 404a-5, absolutely. This should be disclosed in your annual notice and any changes should be disclosed at least 30 days before the fee is incurred. You shoul'd also disclose all the participant level fees that may be charged if a participant utilizes a certain option like distributions, loans, etc. Are your plans with platform RKs like JH, Principal, etc? If so, it should be fairly easy to cover. Most of mine pay outside of the plan as well, but if it can be paid from the plan, you have to disclose that and what the fee is. Yes, it has been required since 2012. There are still a lot of bad / vague disclosures out there, but the DOL is looking at both 404a-5 and 408b-2 disclosures, and it should be pretty easy to disclose on the TPA level.

non-resident alien and who receive no earned income (within the meaning of section 911(d)(2)) from the employer which constitutes income from sources within the United States.

There is a good section in the EOB on this. Ch 4 - Section VI - Part B - 5 1.411(a)-4(b)(6) requires that the benefit is payable. Since we are talking about missing participants, payable means without consent. It follows that forfeiture under 1.411(a)-4(b)(6) should be limited to the notice and consent exceptions under 1.411(a)-(11). It is also worth pointing out that the DOL does NOT allow for forfeiture of vested benefits and considers it a PT. Until we get further guidance from the DOL, I would avoid forfeiture as a solution to missing participant funds.

I'm not convinced OP is asking for a lumpsum from the plan. Those not in our industry often throw around terms that have a very precise meaning to us but mean something different to them. OP could be asking if they could get an order that parties have agreed on a payment that does not involve the plan, overriding the first DRO. In that case, the @QDROphile is correct. If the OP is still talking about a payment from the plan, then you are correct, they obviously need a QDRO to pay the AP from the plan.

The DOL is aware that many have inflation guards so it really doesn't look that weird. I do 10% rounded up. $800,555 in assets become $80,056 in order to avoid my admin software warning that the bond is not 10% If I leave it at $80,055.

Yea it is always good to give them some heads up. Its easier to do that than deal with un-cashed checks and missing participants.

No special tax notice needed for distributions under $200 Treas. Reg. §1.401(a)(31)-1, Q&A-11.

Yea there are a lot of disclosures out there that do not come close to meeting the requirements. At this point, there really is no excuse for not making a good faith effort to disclose even the most complicated formula. For TPA fees, it is usually very straight forward though

Your annual 404a-5 disclosure has to disclose administrative service fees that may be charged against participant accounts (such as record keeping fees and TPA fees). It can be a dollar amount or a formula, but must explain what the fee is, it is not enough to say that you might charge a fee. There other requirements such as the comparative chart and investment instructions but that is another discussion. Your quarterly 404a-5 disclosure has to specify the dollar amount that was charged and what it was charged for.