Distribution Used Wrong Vesting %

[DP]

We have a medical practice with a PS plan which uses a 6 year vesting schedule. Two doctors recently terminated their employment and are 60% vested. Without going through us, the owner/doctor instructed the broker to rollover 100% of these terminated doctors' PS assets to their respective IRAs.

If the owner/doctor does not want to retrieve the 40% forfeited amount from the IRAs, will this result in all participants becoming 100% vested?

[david rigby]

What does the owner/doctor say about why he/she is not administering the plan according to its written terms?

Who does he/she think is going to pay the amounts that should have been forfeited? (Certainly not the other participants.)

Is there any possibility of misunderstanding? For example, when owner/doctor "instructed" the broker, is it possible he/she meant to rollover "100% of the vested amount"?

[DP]

We have a problem with this owner/doctor "playing by his own rules".

The forfeitures would have been used to offset the employer contribution for 2002.

The owner/doctor intended for the terminated doctors to receive 100% of their account balances. There was no mistake in his communication with the broker.

In my conversation with the broker, they did say if the owner/doctor sent them a letter saying he had made a mistake that they could retrieve the overpayment from the IRAs. I don't think the owner/doctor will agree to write this letter.

[rcline46]

Write to the owner stating the distributions were incorrect, and include a letter to be signed and sent to the broker. At the same time notify the terminated ees that they were overpaid.

Give the owner a short time (say two weeks) to comply. Prepare plan records correctly with a receivable for the overpayment.

If Dr. does not comply, resign. Write to owner exact reason for resigning and place copy of letter in file.

[david rigby]

...

you might also mention to the Doc that the penalty for failure to follow the terms of a plan is disqualification. Mention the tax consequences (and PR) of that.

[jpod]

Is the good doctor willing to consider amending the plan to accelerate the vesting schedule in some fashion for the termnated doctors and all other participants similarly situated?

[DP]

We just got the owner/doctor to agree to write a letter asking for the overpayment back from the IRAs.

Thanks for everyone's input.

[david rigby]

Don't expect it back. Plan for what phase 2 will be. Probably jpod's suggestion.

[Guest stryan]

I have had pretty good success in recovering overpayments from IRA accounts. Often times, the IRA custodian is not in a position to willfully accept inelgible IRA funding or contributions. With clear and explicit notification to the custodian and the completion of the usual red tape, I would expect the recovery of the overpayments to be recovered.

On cash payments, recovery of overpayments has been something short of nil.