DB plan benefits paid out of wrong, but related, trust - how can it be corrected?

[Guest cstrong]

We have 2 related DB plans. One plan's trust has had good invesment performance, and the other plan's trust has not. Benefits from one plan have been paid out of the wrong trust, the trust with poor investment performance. How should we correct the trusts' balances?

For example, if $100,000 in benefits is incorrectly paid out of the trust which had negative invesment performance (it should have been paid out of the trust with positive investment performance), do we simply take $100,000 from the trust the benefits should have been paid from and deposit it in the trust in which the benefits were incorrectly paid from? How do we factor in the fact that the trusts had very different investment results?

Any suggestions are greatly appreciated!

cstrong

[AndyH]

More details are needed. What is the time frame, how was this discovered, who discovered it, and why did it happen? Obviously it must be corrected, but the income issue may depend upon whether or not it is a prohibited transaction.

[Guest cstrong]

The benefits have been paid out of the incorrect trust for approximately 2 years, and the company discovered the error. The benefit payments starting to be paid from the wrong trust at the same time participants in 1 DB plan were merged into another DB plan.

[AndyH]

Well, certainly the incorrect payments need to be corrected through reimbursement of one plan to another, and then I would think you need to put the plan which incorrectly made the payments in the position it would have been in had the error not ocurred (i.e. income on the money incorrectly paid). I'd probably be inclinded to tell the sponsor to reimburse the income in an amount equal to the greater of what the money would have generated in EITHER plan, although you could run afoul of deduction rules if that were deemed a contribution and not the correction of a fiduciary breach.

But if the income would not amount to a lot of money that is what I'd do anyway. And how much income would have been generated in the last couple of years in this market? So maybe there is no lost income.

Just some gut reactions; not legal advice.

The correct answer is always to run this sort of thing by an ERISA attorney, of which there are many on these boards.

[david rigby]

Andy's response is good. As he implies, the plan(s) need input from ERISA attorney, but don't forget to run this by auditor, to make sure there is no problem with deduction.

I suggest that repayment of the principal need not wait for determination of the interest amount.

This problem is not uncommon (although not for two years), so don't be reluctant to have complete documentation and disclosure.