ERISA Biker

I think the correction for any funds transferred to the IRA is straightforward under the EPCRS. Attempt to get the money, plus earnings, back from the participants and notify them that, due to an error, the original distributions were incorrectly made and not eligible for tax favorable treatment -- i.e., rollovers or IRA contributions.

Let me suggest another solution since both 401k plans are managed by the same TPA: Under Regulation 1.401(a)(31)-1, Q&A 14, Company A's 401k plan is required to return the improper rollover contribution to the participant, plus earnings. Let's assume the rollover contribution was $10,000, and there are now $1,000 in earnings, for a total of $11,000. Under the EPCRS, Company B's 401k plan is required to attempt to recoup the overpayment (in this case, the improper rollover distribution of $10,000), adjusted for earnings (which may or may not be the same as the $1,000 in earnings noted in the prior bullet point). Since we have the same TPA involved, couldn't the $11,000 in the participant's account in Plan A simply be moved back into his or her former account under Plan B? In that scenario, both plans have corrected the mistake as required by the IRS guidance. And I would treat this as "self-correct-able" under the EPCRS. Thoughts? Anyone willing to poke serious holes in this proposed fix?

Here is my fact pattern: Company A and Company B are in the same controlled group of companies. Company A and Company B each maintain separate 401k plans. A group of employees are transferred from Company B to Company A. Company B's 401k plan treats these employees as being terminated and allows them to take distributions and/or rollover their accounts. Rollovers wind up going both to IRAs and Company A's 401k plan. I believe this is a plan operational error. Because the employees remained in the same controlled group, I don't believe there was a termination of employment that would have triggered a distribution event under Company B's 401k plan. If I am correct, there are a few issues here. One of which is Company A's 401k plan accepting a rollover that turns out not to be an eligible rollover distribution. Is there any authority for asking the IRS, as part of a VCP application, to treat this as a plan-to-plan transfer for the affected employees? Both Company A's and Company B's 401k plans would need to be retroactively amended to permit this transfer, but it strikes me as the "best" or "most reasonable" fix here. Any helpful thoughts would be appreciated.

My view on Question 1 is as follows: When Employee X transfers to Company A and begins to participate in Company A's 401k plan, he receives service credit for his future service with Company A and for his prior service with Company B since the date that Company A acquired Company B. I have not found anything in IRC 414 or 411 that requires the Company A 401k plan to give service credit to Employee X for his Company B service before Company B became a member of Company A's controlled group. Mike and Lou seem to be saying otherwise. Any authority that I can be pointed to on that? Contrast this with the analysis under the Company B 401k plan: Employee X receives service credit for his entire service with Company B (the plan sponsor), both pre- and post-acquisition. Employee X also receives service credit for his service with Company A once he is transferred there (as Company A is at that point part of Company B's controlled group). So, under my analysis, Employee X gets service credit under both 401k plans for all of his service post-acquisition, but only under the Company B 401k plan for his service pre-acquisition. And then, turning to my Question 2, I think this distinction goes away once (if) you merge the Company B 401k plan into the Company A 401k plan, as that then brings his additional service credit under the Company B 401k plan into the Company A 401k plan. Is this the incorrect way to view this? Is my analysis implausible? If so, I am not understanding why?

Here are the scenario and the questions: Company A acquires 100% of Company B (stock deal). Each company maintains its own 401k plan. After the acquisition, Employee X is transferred from Company B to Company A. As a result, Employee X begins to participate in Company A's 401k plan and stops participating in Company B's 401k plan. Question 1: For purposes of vesting employer contributions under Company A's 401k plan, must Company A give vesting service credit to Employee X for his service with Company B prior to the corporate acquisition? I think no, but would appreciate some thoughts. (I think it is agreed that vesting service credit must be granted for the period of time after Company B joined Company A's controlled group.) Question 2 (this question assumes that the answer to Question 1 is no, otherwise this question, I think, is moot): If, after Employee X begins working for Company A and participating in Company A's 401k plan, Company B's 401k plan is merged into Company A's 401k plan, must Company A's 401k plan give Employee X vesting service credit for his service with Company B prior to the corporate acquisition? I think so based on IRC 414(a) and Reg 411(a)-5. Again, would appreciate some thoughts.