Plan assets discovered long after plan terminated.

[Belgarath]

Here's a bizarre question. You've got (had) a Profit Sharing plan. Plan terminated 10 years ago, all assets distributed, business no longer exists, Trustee has died. Don't ask me how this happened, but there was a small investment of the plan which somehow got lost. Evidently was not properly registered to the Trust, which is why no one ever knew about it.

I don't know any more details than this - it was a phone call from an accountant. Any suggestions about what to do with this money? How to handle the situation? Is this going to revert to the state, etc.? Thanks!

[jpod]

I haven't had a situation like this one, but it could be a real mess to clean up properly.

I assume from your post that the investment was not a self-directed investment for a single participant, but rather a plan-wide investment. Clearly, the value of the invesment belongs to the participants, but which participants? When the plan was alive, was the value of the asset taken into account each year in determining each participant's account balance? If not, the asset would not necessarily belong solely to the participants who had open accounts as of the termination date; some portion of it may also belong to participants who received a full distribution (or thought they received a full distribution) before the termination.

Also, you have the issue of whether the plan was not "terminated" within the requisite period for tax-qualification purposes. If not, you would have, technically, a frozen plan that was never terminated and may not have been timely amended for TRA 86 (let alone GUST).

How much money are we talking about? If it's an investment that was worth $500 but the plan's assets at termination were $1,000,000, the real risks (as opposed to the theoretical risks) associated with doing nothing and turning the money over to the State, or to a public charity, are a whole lot different than if it is an investment worth $50,000.

Putting aside the question of who will pay your fee for sorting through all these issues (although that's an important issue too), you should have a conversation with someone at IRS who is relatively high up in the EPCRS unit, to sort through the qualification issues. And, to the extent there are potential ERISA fiduciary responsibility issues involved, you should look at the DOL's new fiduciary violation relief program and perhaps speak with someone at DOL.

In the end, I suspect that you will find a million potential problems here, but perhaps nobody will agree to pay for your or another competent professional's time to fix them.

[Kirk Maldonado]

I had the same situation, except my facts were even worse; the plan was still in existence. (Believe me, it's even worse if the plan is still around.)

Fortunately, I lost the client before we were able to reach a resolution. Although I spent a lot of time on the issue, I wasn't able to come up with any cost-effective solution.

The later-discovered asset was about $60,000 or $80,000, so we couldn't burn it all up paying plan administrative expenses, which is probably the best of the alternatives that I could come up with.

[mbozek]

I have seen this issue in two situations: one was a 401(k) plan of a bankrupt employer where there was a side fund which accumulated interest on the float for interest credited on distribution checks before they were cashed. Fund wasnt discovered until after the participants had been cashed out. I thnk the fund was transfered to the bankruptcy estate since the amount pyaable to the particpants would have been less than a $1 each.

the other situation was an asset of terminated ps plan which surfaced after the busines owner died. The amount was paid to his estate.

First Q- who is the listed owner of the asset? The trustee of the Plan?

Second Q- can you identify the paraticipants of the terminated plan. If so why nbot make a distribution to them as after tax money on the grounds that plan terminated yers ago and tax deferred status expired after plan was terminted. Its agood as any other answer. Other possiblityis treat the distribution as a taxable amount from a disqualfied plan (its the opposite of a distirbution from a terminated q plan but less plausible since the plan was qualified upon termination.)

Third Q- Is there a sucessor plan? If so why not deposit the asset into the sucessor plan and allocate to active participants as the sucessor to terminated plan. If no plan, can er establish new plan and use aseet as initial asset under merger of plan theory?

[KJohnson]

This is an issue facing a number of terminated plans who are receiving demutualization proceeds (in addition with some issues on "whose money is it'--i.e. participating v. non-participating contracts etc). I agree there is no easy answer.

BTW--For anyone out there who has decided the must allocate demutualization proceeds to former participants in a terminated db (or even a mppp that bought a group annuity contract) how did you go about deciding which of the former participants were entitled to the proceeds and the allocation that should be made to these participants?

I have tried to get the insurance company to give me some more explicit breakdowns and have gotten nowhere.

As to JPOD's issue of getting paid (and Kirk's comment) I think that if the Plan provided for payment of administrative expenses from plan assets this is defintiely a plan/fiduciary rather than a settlor issue and the fees could be paid from the "discovered" assets.

[Kirk Maldonado]

I think that the plan can be drafted in such a way so as to make this a "settlor" rather than a fiduciary function.

[KJohnson]

If the plan says that the employer pays all administrative expenses then (while I don't think that this makes payment of administrative expenses a "settlor" function) clearly the Plan could not pay the expense.

However, it would seem to me that the costs associated with both marshalling plan assets and allocating those assets to participant accounts is a classic plan/fiduciary expense.

What were you envisioning that would make this a settlor function (as opposed to a fiduciary function where the employer agreed to bear the cost of that function).

[Kirk Maldonado]

KJohnson:

Your message is predicated upon the assumption that the plan says that the employer will pay the expenses.

My message was that the plan could be drafted to avoid the issue.

Obviously, if the plan says that the employer will pay the expenses, that is the worst case from a drafting perspective.

The best case would be where the plan says that it will pay all of the reasonable expenses of administering the plan (which I believe is the wording in ERISA).