401K Report Information

[Guest pctesa]

We have a company handling our 401K for our business. A little over a year ago they informed us that two of the employees (owners and employees of the corporation) fit the category of highly compensated and shouldn't have been putting in as much money as they did for the past three years. Money was refunded and penalities were paid. Now another situation has arisen that they never made us aware of. We have several employees who no longer work for us but they are still appearing on our 401K with small amounts of money in their accounts. We don't have any addresses on these past employees but the 401k company is telling us we need to be mailing them reports which include everyone's current salary. Obviously after the first mistake we are leery at accepting at face value what they tell us. I'm hoping someone can give us a second opinon. What do we need to send 401K participants?

[Tom Poje]

there is no requirement to send a list of salaries. I have heard of some strange suggestions before, but never that.

you are required to privide a statement of a participant's balance to all terminees. (Strange to say, this is not actually required of active participants unless they request them, but why you wouldn't is beyond me)

you are also required to provide the SAR to all (whoever completes the 5500 should provide that to you) In a nut shell, this statement says:

Hi! there are $$$$$$$$$$$$ in the plan. there were $$$$ in gains and -$$$$ losses, etc. The participant can then look at his individual statement and see that his $ is paltry compared to the big scheme of things.

I think most people simply throw the SAR away as it doesn't make a big difference one way or the other.

As for tracking those people down - well, there is not much you can do if you do not have there address. But that is another issue, how do you pay people out if you don't have their address....

[Brian Gallagher]

I believe the IRS has procedures for dealing with "lost participants" and/or beneficiaries. under certain circumstances, the money in the accounts (even the vested money) can be treated as forfeitures.

what thos exact circumstances are, i don't know. the plan administrator has to go through reasonable lengths to find these people, but other than that, i'd contact the irs (or dol?)

[pmacduff]

I am always amazed when a Company says it has no address on a former employee. Weren't they receiving a paycheck? How did they get a W-2 form at the end of the year? Even though it is difficult in some circumstances, I would start with old payroll records - you can also check the local phone listings...you'd be surprised at how many people you can find that way. Also as Brian mentioned - you can send notices through the IRS locator program - they will forward information on to the last address that they have from tax filings by the individual. They will not, however, provide you with an address so you sometimes never know if the information gets through. We have had luck with the IRS program, though. My suggestion is to try and find these people and get them paid out. Once you have exhausted all efforts, then look to the document and other methods as Brian mentioned (ie., forfeitures). As for your TPA - were you providing timely and accurate information to them for checking the testing, etc.? If everything your provide to them is clean/timely, I would suggest looking into another TPA, there are plenty of good firms out there all across the US!

[2muchstress]

Maybe I am misunderstanding the question, but why would a recordkeeper be doing 3 years worth of ADP tests at once? Or was it on three separate occasions where money had to be refunded.

Next question - When do you provide your recordkeeper with the company's census data? As a TPA, we send all of our clients a year-end package in December (for calendar year plans). This package requests the census and explains why it is needed. It also explains that 401(k) plans must pass a non-discrim test and if this test fails, money must be returned to the HCE's by March 15th to avoid penalties.

We then follow up that request in February and basically tell them that we need the census before March 1 so we can do the test and return excess contributions if necessary. However, if we get the census later, we still make every effort to perform tests and return $$$.

If we don't receive the census on time, and the plan fails the non-discrim test, then the plan sponsor pays the 10% penalty. If we did receive the census on time, and we goofed, then we will pay the 10% penalty for the plan sponsor because it was our error. This does not happen frequently because the bosses frown on it. Go figure?

Basically, all of this can (should) be avoided if you provide census data to your record keeper early in the year. After the census is provided, call them and ask about the tests. Knowing that you have failed the test in the past, they should give it high priority.

[2muchstress]

As for the lost participants. Document your efforts to try to locate them. Call family members, use the internet, even run a credit check. If all of these options fail, and you have it documented, then distribute the money with 100% being withheld for federal taxes. Then it becomes the IRS's problem and not yours.

Some people disagree with this approach, but I have heard many big name ERISA attorneys argue in favor of it. The key is that you actually spend the time and effort trying to locate these people before you do any thing else.

It is possible to forfeit these people as well, but you still have to try to locate them. If they come out of the woodwork after you have forfeited them, then you still have to fork over the cash to pay them out. This brings up a fiduciary issue of potential lost earnings and personally, I would try to avoid it.

I don't believe there is anything written that says you would have to pay the lost earnings, but I think the participant might have a valid argument that they would be owed to him.

[david rigby]

Going back to the original post, if the TPA is not aware that employees in question are terminated, then they will continue to request other census data, such as compensation. If that is part of the problem, they also need the termination date and the number of hours worked in the last year of employment.

[Brian Gallagher]

here is an item from our prototype that was approved by the IRS:

Inability to locate participant or Beneficiary. If the Plan Administrator, after a reasonable effort and time, is unable to locate a Participant or a Beneficiary in order to make a distribution otherwise required by the plan, the distributable amount may be forfeited, as permitted under applicable laws and regulations. In determining what is a reasonable effort and time, the Plan Administrator may follow any applicable guidance provided under statute, regulation, or other IRS or DOL guidance of general applicability.

[Brian Gallagher]

keep in mind, though, that my above post applies to the prototype my company uses...your document may treat lost particiants differently.