restorative payments

[Guest D. Leeke]

It is my understanding that unless a plan sponsor has reason to believe they will be sued, restorative payments must be considered a contribution to the plan. Following are 3 examples of different restorative payments. In all situations, we assume that the payments would be considered contributions. How do you justify allocating these payments as contributions, since the plan document does not allow for a contribution allocation of this type? Do the payments have to go in as 100% vested? It is my understanding that they would be included as an annual addition - is this correct? Are there any situations where you would also include them in your ADP or ACP testing? How do you treat them for other testing, such as coverage testing?

Situation 1: A participant requests a transfer among investment funds. Due to a TPA error, the transfer is done incorrectly and there is a loss. The TPA makes a deposit to the plan to make up the loss.

Situation 2: A participant requests a transfer. The plan sponsor failed to notify the TPA of the request, so the transfer is not done. The plan sponsor makes a deposit to the plan to make up the loss.

Situation 3: A participant requests a distribution in June 2001. The plan is in the process of being converted from one TPA to another. For various reasons, the distribution cannot take place until February 2002. There has been a large drop in the market value so the participant receives considerably less than he would have had the distribution taken place in June or July, 2001. The plan sponsor would like to make up the difference. Can the difference be deposited into the plan so that the employee can roll it over? If so, how is it handled?