Incorrect Rollover into 401(k) Plan

[Guest marie567]

An employee rolled money into our 401(k) plan. We later received notice that she was overpaid from the prior plan - a recordkeeper error. The employee is claiming the amount is correct. We received advice to send a letter to employee and prior sponsor that until we received either legal direction or agreement from the employee and prior employer that the rollover is incorrect, that we'd hold onto the entire rollover. We heard nothing from any party until recently from the former recordkeeper asking for the excess. Our 401(k) plan recently made a change and now allows for inservice withdrawals of rollovers. The employee wants to withdraw the entire amount of the rollover. Do we distribute the money?

[Guest stryan]

The horse is out of the barn!

Once you have been provided with information indicating that this participant may have funds that don't belong to her, I would think it most imprudent to procede with distributing those dollars to her.

For your plan, the issue is to see that the acceptance of "unqualified" money is corrected, if in fact, that is what happened. The particiapant's issue is with the former recordkeeper, so I would tend to get out of the middle and let them settle it.

Good luck.

[Mike Preston]

"We received advice to send a letter to employee and prior sponsor that until we received either legal direction or agreement from the employee and prior employer that the rollover is incorrect, that we'd hold onto the entire rollover. "

You might want to get a second opinion on that advice. Maybe it works, maybe it doesn't. As a participant, if I rolled over money, I know that I wouldn't want a letter from a third party indicating that the rollover was incorrect to potentially interfere with my ERISA rights in that plan.

I received advice from a lawyer once in a similar situation where I was advised to write to the party claiming that the amount was "too much" and tell them that in the absence of a court order, my firm would have no choice but to follow the terms of the plan, including honoring any participant withdrawal requests.

The other party then had a chance to decide how it wanted to proceed. Thankfully for us, they decided to have their attorney deal directly with the participant. I believe, had the participant not been willing to deal with them, they would have gone to court to force the participant to do what they thought was right.

I don't know what the attorney that gave us the advice would have told us to do had the other plan decided to include our client's plan in a court order of some sort. If it was a state court order, knowing that attorney as I do, I'm pretty sure he would have suggested that the order be resisted. Of course, if it was a federal court order, then he would no doubt have suggested that it be followed.

At the end of the day, though, in the absence of a valid court order, the advice no doubt would have been: "follow the terms of your plan, as you really have no choice."

[QDROphile]

The terms of the plan do not exist in a vacuum. The plan probably should be interpreted to mean that it will accept amounts that are eligible for rollover, regardless of the exact words are. Otherwise, the plan would not qualify. The IRS has made it OK to be less than supervigilant about rollovers, but it does not change the rule that a plan cannot accept an ineligible amount and must find a remedy if it does. You should get advice about what to do, but if I got the money in a direct rollover, I would not distribute it to the participant if the sending plan advised that it sent too much. I think the sending plan is the better authority in that case, and it was the source of the money. Putting the money back to the source is a very attractive proposition. If you had doubts about the amount in the first place, you would have effectively placed the money back with the source by refusing to take it.

[Mike Preston]

I suppose there are facts that might bear on the issue, too. If the timing was almost immediate, then I can see paying some sort of attention to the sending plan. However, in another recent thread, an individual was notified by the sending plan (in that case it was an IRA, not a receiving plan) that the amount was "too high" more than two years later. By that time, the funds had gone down due to investment selections that didn't turn out too well.

In this case, the Plan has the right, under the IRS regs to rely on reasonable statements that the monies were, in fact, rollable. It used to be that conservative plans wouldn't accept rollovers unless the sending plan provided an LOD. Thankfully, that is no longer the case. And that principle still holds. If the plan acted reasonably to accept the monies, the receiving plan should be immune to IRS attack regarding those funds.

We don't know, in the case, what "later" means in marie's initial message. We don't know whether the participant's accounts have individual direction. We don't know whether the participant's acount value has declined.

I would be very reluctant to send money back to the sending plan without authorization from the plan participant.

Maybe, if the plan participant elects a distribution of the rolled over monies, the plan can interplead the funds?

[QDROphile]

The IRS relief for plans that accept rollover money does not extend to accepting the rollover if the plan adminstrator knows it is bad or keeping it under a reasonable suspicion that it is bad, even if the suspicion arises after the money moves.

[Mike Preston]

You may very well be right. But I haven't seen any case on point, or anything from the IRS that addresses what to do if the recipient plan develops a doubt post-reasonable-acceptance.

And, in this case, I believe that Marie indicated that the participant specifically thinks the amount is the correct amount. A bit of a difference from the situation where the sending plan indicates an amount is too much and the participant merely states that they have no reason to doubt that the initial distribution is correct.

Any votes for interpleader?

[Guest Retina]

But I haven't seen any case on point, or anything from the IRS that addresses what to do if the recipient plan develops a doubt post-reasonable-acceptance.

Treas. Reg. 1.401(a)(31)-1, Q&A 14 indicates that relief is available only: "...if the plan administrator of the receiving plan later [i.e., after reasonable acceptance] determines that the contribution was an invalid rollover contribution, the amount of the invalid rollover contribution, plus any earnings attributable thereto, is distributed to the employee within a reasonable amount of time after such determination."

It seems an argument can be made that the plan has an affirmative duty, at least under the regs (and assuming the plan has determined a portion of the rollover was invalid), to distribute the "bad rollover" amount to the participant even absent the w/d request.

[Alf]

Plans that accept rollovers should follow the regulations. My answer would have been to distribute the disputed amount to the participant, regardless of whether it was a distrbutable event under the plan. That money shouldn't have come in and it should go to either the sending plan or the participant and the regss say send it to the participant.