Delayed Transfer of 401(k) Funds

[chris]

Client employed new tpa to handle 401(k) plan. All plan funds to be moved to new investment manager/company. Employer directed old investment co to cut check to move the funds. Employer sent check to tpa so tpa could get money to new investment co as per tpa's request. TPA lost the check and did not tell employer for some time. Employer talked to tpa and tpa gave excuses as to why the money had not shown up. Meanwhile, employer got stop payment orders for the checks and had the old investment co to cut a new check. The funds have been uninvested in any manner for 2 months. Also, deferrals have not been invested for that same 2 month period. Besides the tpa liability, would it be worth it to go through the dol vfc program regarding the noninvesting of the deferrals?? Also, would the IRS take the position that a prohibited transaction has occurred with respect to the deferrals??? Any other comments or suggestions appreciated.

[QDROphile]

Did you ask about how much trouble is generated by having the employer put its hands on the money rather having transactions conducted by the trust -- the owner of the funds?

[chris]

Employer didn't get its hands on the funds. Individual trustee who is also an employee of the corporation got the investment companies to stop payment on the checks. Trustee has the voided checks and the money never left the investment companies since the checks were never negotiated. Trustee is getting the moneys invested in a conservative investment until correction can be made and the participants notified. As I stated before, one group of checks involved all of the plan assets. The second group of checks were deferrals that the employer had sent to the new tpa to be invested according to prior participant directed investment instructions. Both checks sat in tpa's lockbox for the duration and tpa told trustee and employer that tpa did not have the money nor know where the money was. Tpa signed off on a service agreement obligating tpa for "all costs associated with any errors or omissions" on tpa's part. Two correction issues appear: 1) plan assets -- restoring participants as to investment earnings; 2) deferrals -- restoring participants as to earnings as per DOL vfc program and 5330 filing and tax with IRS. Anything else to be done other than looking at tpa to foot the bill??

[Guest IWIS]

I don't understand why the existing plan assets weren't invested for two months, though. Were they sitting in a non-interest bearing account all that time waiting to be transferred? If so, why? In any event, it would seem the plan fiduciaries should restore lost earnings to the plan. It seems to be a 404 issue - general breach of fiduciary duty. No prohibited transaction with respect to these funds appears to exist, based on the info you provided.

With regard to EE deferrals, per DOL regs, deferrals must be deposited as soon as administratively feasible, but no later than 15 business days following the close of the month during with the contributions were deducted from employees' pay.

In some cases, the DOL has held sponsors to a stricter standard when the sponsor has demonstrated, in the past, its ability to deposit contributions faster. For example, if the sponsor has a history of depositing employee contributions two weeks from the date of withholding, but then for whatever reason starts depositing them later, but still within the deadline imposed the regulation, the DOL has deemed those contributions to be "late" and characterized the resulting extension of credit as a prohibited transactions.

Many sponsors and TPAs think this DOL policy is unreasonable. I happen to agree, unless there's some indication that the sponsor is intentionally taking advantage of the plan participants.

Bottom line -- if there are legitimate business reasons for having deposited the contributions later than usual, yet the deposit is still made within ultimate deadline and the amount of lost interest is relatively immaterial, it is extremely unlikely that the DOL or the IRS is going to pursue any sort of action or excise tax assessment. I guess it could happen, theoretically, but I've never seen it.

The excise tax is the 15% times the amount of interest lost -- NOT the total amount of the late contribution. Because of this, and unless the late contributions were very large and very late, the amount of the excise tax is usually de minimis (pennies, a few dollars).

In terms of whether it's worthwhile to utilize the DOL's VFC program, I'd encourage you take a look at these two articles:

Is the DOL's voluntary correction program more trouble than it's worth? (Plan Sponsor Magazine, July/August 2000; free registration required)

http://www.plansponsor.com/archives/test/0...psjul00_084.asp?

Friend or Foe? The Pros and Cons of the New Department of Labor Voluntary Fiduciary Correction Program by Marcia S. Wagner, Esq.and Deanna H. Niño, Esq. (former PWBA investigator, Boston Regional Office). A discussion of the pros and cons of the VFC Program, and the circumstances under which participation in the program might not be desirable.

http://www.erisa-lawyers.com/pages/misc/fr...friend_foe.html