plan asset question

[Guest RBeck]

Can a plan be written so that amounts in excess of the 402(g) limit are returned to the employer rather than deposited in the trust? If so, how are the 402(g) excesses returned? To the employer to be included in the participant's next paycheck? To the employee via 1099-R? If not, is the recordkeeper acting in a fiduciary capacity by returning the funds? DOL regs are pretty clear on the fact that amounts withheld from a paycheck are plan assets when withheld. Any thoughts?

[R. Butler]

Excess deferrals are distributed to the participant and reported on a 1099-R. If the excess is not distributed by April 15 following the year in which the excess occurred, it may not be distributable until a distributable event occurs for the participant. In either case the excess does not revert to the employer.

[Guest RBeck]

I realize what the deadlines are. The problem is that the third party administrator does not forward amounts in excess of the 402(g) limit to the trustee, based on its interpretation of the plan provision that limits deferrals to the 402(g) limit. These amounts are not posted to the trust, therefore the client feels that they are not plan assets. I disagree. I believe those amounts are plan assets, and need to be treated as such. The issue is how to convince the client.

[david rigby]

We have considered it before, but if the limit is exceeded before the end of the year, perhaps a negative deduction can be applied in the next paycheck. Not sure if this is valid, but it sure is nice from a mechanical perspective.

[QDROphile]

Deliberately preventing a 402(g) excess from being delivered to the trust is a perfectly legitimate way to comply with 402(g) and the amounts that are timely intercepted are not plan assets, if the plan and the election forms are properly drafted. If the amounts are not plan assets, they can be returned to the employer and the employee. You do need to consider phenonmena that straddle a tax year for proper attribution. This is no different from a payroll deduction stop at the 402(g) limit. I think you read too much into the DOL regulations. They are concerned with timing only, not what constitutes a contribution iin substance.

[R. Butler]

It looks like I misunderstood the original question. I did not realize that the excess had not yet been deposited to the investment account. Having said that, I am not sure my answer changes. If this a situation where the participant exceeds 402(g) in just one plan, the payroll administrator probably should have caught it. This is different than catching it in the payroll department. The DOL is clear that deferrals become plan assets as soon as they can reasonably be segregated, in most cases that is within days. In this case the deferrals were actually segregated; a check was sent. This is such an easy thing to correct via normal measures, I just don't see a reason why any TPA would hold the money.

[QDROphile]

What if the TPA's job is to assure compliance? The TPA compares the receipt by the TPA against the 402(g) accruals to date of each participant. Lo and behold, the participant already has $10,500 for the year. The plan says no more than $10,500. TPA notes that the money is not a legitimate contribution because the plan does not allow more than the 402(g) limit. The TPA sends the excess money back to payroll and says, "sorry, you sent me money that cannot go into the plan, I cannot deliver it to the trust." The TPA has done its job properly.

No one would have a problem if the comptroller looks at the disbursement before it leaves the payroll department. The comptroller compares the disbursement against the participant 402(g) accruals to date. Lo and behold ....

What is the difference between the TPA and the comptroller, except the TPA is in a different building?

[R. Butler]

QDROphile,

I generally don't disgaree with your posts, but in this situation the TPA returning the money is not the best solution. The difference between the comptroller catching the excess and the TPA catching the excess, is that comptroller catches it before the deferral is segregated and becomes a plan asset. Again, the DOL is clear that the deferral becomes a plan asset as soon as it can reasonably be segregated. In this scenario the deferral has already been segregated.

There may not be a problem if the TPA returns the money, but there could be. The TPA is not failing to assure compliance by depositing the money and then correcting via the specified procedures provided in the law and the document.

[QDROphile]

The DOL rules are rules of timing. They determine when an asset that is destined for the trust is treated as a plan asset. But if the plan is designed correctly, a 402(g) excess is not eligible to be a plan asset. If the system works properly, an excess is not destined for the trust; it is ineligible. It is an error if the money slips through. If that error occurs, I agree with R. Butler that the options for correction become limited. But I think there are many options for dealing with the excess before it becomes a problem, including interception at any point before the money mistakenly gets to the trust.

[Moe Howard]

RBeck: Your first message implies that the TPA has deposited the excess into the trust but your second message says that the TPA has not posted the excess to the trust. What exactly do you mean ?

The TPA must follow the direction of the trustee, or risk being fired as TPA. Keep in mind that a TPA is only a service provider. A TPA is not the plan's administrator.

Your second post says that the TPA does not forward excess amounts to the employer. Well, TPA's do not have ESP ...they are not mind-readers. The trustee must tell the TPA to forward all excess amounts to the employer. Keep in mind that the plan's trustee can withdraw any amount from the plan that he wants ... when ever he wants. He does not need the TPA's permission.

The second part of your question inquires about how the excess is returned to the employee. I would suggest a check (sorry for my odd sense of humor). If the error is realized prior to Dec 31, then the trust should issue a check to the employer for the excess and then the employer should issue a company check (net of fed & state income tax withholding) to the participant. The excess would then be included on the employee's W-2 as regular salary.

If the excess funds are not paid to the participant until afer Dec 31 ... then no fed & state income tax would be withheld, the entire amount would be reported to the employee on Form 1099-R and the employee could avoid the 10% early distribution penalty by reporting the distribution on his individual tax return for the year that the excess arose in.

Since the TPA is the record keeper, then the TPA is probably the first to realize that an excess deferral was withheld by the employer. Big deal, who cares. The only question is ... when do you want to correct the error (before Dec 31 or after Dec 31) ?

Forget about trying to word the plan to handle a smart-ass TPA. Just have the trustee call (or write) the TPA and tell him that in the future he is to contact the Trustee as soon as TPA is aware of an excess contribution and then the trustee will direct the TPA on what he is to do (namely: transfer the excess to the trustee before Dec 31 or after). Is this a self-trusted plan ? Maybe the employer is also the trustee.

And oh yea, elective deferrals are plan assets at the time they are withheld ... but excess elective deferrals are never plan assets until they are deposited into the trust. Elective deferrals (by definition) are not included in participant's income. Excess elective deferrals (by definition) are included in participant's income. Therefore excess elective deferrals are never owed to the trust when they are withheld (they are owed to the employee).

[Guest RBeck]

Moe - the amounts deducted are NOT deposited in the trust. The TPA stops the amounts from going to the trustee and returns the money to the client for disbursement back to the employee. QDROphile, I want to agree with you as far as how these amounts are handled, but the preamble to the DOL reg is pretty clear - "For purposes of subtitle A and parts 1 and 4 of subtitle B of ERISA and section 4975 of the Internal Revenue Code only...the assets of the plan include amounts (other than union dues) that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his wages by an employer, for contribution to the plan, as of the earliest date on which such contributions can reasonably be segregated from the employer's general assets." What provision would you put in the plan and/or on the election forms to prevent amount withheld from being considered plan assets? And does the TPA take on the role of a discretionary fiduciary by intercepting the funds before they go to the trust?