Separate Plan Checking Account?

[Guest jmarini]

Are small 401(k) Plans (under 100 participants) required to have a separate bank account through which they funnel contributions, withdrawals, etc. or can they use their main business bank account for those purposes? We are a TPA working in an unbundled environment and always recommend to small 401(k) clients with individual trustees that they open up a separate plan bank account. However, the bank for one of our new clients is giving them grief about this - the bank does not want to open the account because the account will normally have just a very small balance. The bank told our client it had never heard of having a separate 401(k) Plan checking account. So I need some information/ammunition before talking to the new client and/or their bank. Thank you!

[david rigby]

"...never heard of having a separate 401(k) Plan checking account..."

Yikes! Just because it is a small plan does not mean it should not be operated correctly, and prudently. Since the assets of the plan are not assets of the plan sponsor, why would anyone want to cast doubt on that and commingle, even in the slightest way?

BTW, it might be prudent to review the new small plan audit requirements. This plan might not be exempt.

[ccassetty]

If the plan has an institutional trustee, there is no requirement for a separate checking account. However, I'm interpreting your question to mean that somebody at the plan sponsor level is/are Trustee(s) of the plan. In that case, I would also tell them to set up a separate account.

I can't find anything directly on point, but Reg 2550.403a-3©, last sentence says that "Upon acceptance of being named or appointed, the trustee or trustees shall have exclusive authority and discretion to manage and control the assets of the plan....." How can the Trustees have exclusive authority and control over plan assets if those assets are routinely commingled in the employer's checking account that has other, non-trustees with authority to draw checks from the account?

If thats not enough, in plans without an institutional trustee, the investment house may make distribution checks payable to the Trustee rather than to the participant. Then the Trustee will turn around and cut a check to the participant. The paper trail that will be left without a separate account is: The plan deposits money in the employers checking account (could this violate the rule that no plan assets can benefit the employer?) and then the participant gets a check from the employer, not the plan (did the participant get their distribution or did they just get a bonus from the employer?) Some might argue that the trustee could simply endorse the check from the investment house over to the participant, but sending an endorsed check through the mail is pretty scary. Granted, I haven't worked with non-institutional trust clients for many years, so this may not be very common any more. But I would verify with the investment house how they will make out the checks just to be safe.

I'm interested to see what others come up with. Hope this helps.

[Guest jmarini]

Thanks for the replies so far. Yes, this Plan has an individual trustee (the CEO), not an institutional trustee.

[Guest RBeck]

why not use a money market fund with check writing privileges?

[pmacduff]

I know another issue that has come to pass with the idea of a Plan checking account...with the DOL now enforcing the earliest possible date deferral contributons can be segregated from the Employer's general assets - many smaller clients are depositing 401(k) deferrals every payroll date into such an account and then moving them into the invested funds as splits are completed or monthly, etc. It remains to be seen if this will satisfy the DOL interpretation of the rule, but it is certainly better than having the assets comingled with the Employer assets, agreed? When I used to recommend that a client establish a Plan checking account to funnel distributions...many of my small employers told me that the bank charges unreasonable fees to maintain an account which at times had little or no balance. This is certainly a quandry for all clients. Whoever discovers a workable/acceptable solution to these issues will be revered in the Pension industry!

[Guest jmarini]

RBeck, what you suggested is what the investment manager for this Plan also suggested, and I think that's what we'll end up doing. They were going to talk to the client and I haven't heard the final word but I'm sure that the client will agree - the only reason the client had a problem with the bank account was because their bank had a problem with it, so this should be a good solution. Thanks for everyone's opinions and advice.

[Earl]

one issue that arises with using a Money Market is the deposit of withheld txes. Banks generally won't take a tax deposit drawn on an account that is not theirs.

You just have to mail in the deposit, which is not a big deal.

I think the current instructions to do that are:

The check is to be made payable to the United States Treasury and the address is:

Financial Agent

Federal Tax Deposit Processing

P.O. Box 970030

St. Louis, Missouri 63197

[Guest mkimball]

See regulation 1.408-2 , in general, and 1.408-2(e)(5)(viii) definitions in particular for application to a trust under IRC 401(a), also see regulation 1.401(a)-2, impossibility of diversion under qualified plan or trust.

I believe that gives you the roadmap for why the trustee must establish a separate account in name of the trust for temporarily holding funds for distributions. To put it in the corporate account violates the above regs because the corporate account is not part of the qualified trust whereas the account established by the trustee is a sub-account of the qualified trust.

[Erik Read]

While I agree 100% that the corporate account should not be used for this purpose, I'm not sold on the fact that there needs to be a seperate checking account created. Most if not all financial institutions where you will hold mutual funds, should provide the plan with either a check book for distributions, or an online request for them.

All plans should have a money market or stable value fund that is liquid, and can be used as holding tank for current contributions if they do not meet the current minimum funding amounts.

Some of the institutions call these "FUNDING ACCOUNTS" rather than the same account as the investments are held in, but I don't see why they need to open the account at their corporate bank.

[Guest mkimball]

I agree with ERead, the separate account does not "need" to be at a bank, it can be part of the mutual fund account, etc. as long as checks may be written from the account to make distributions.