Blackout Periods and Make Whole Contributions

[Christine Roberts]

Employer is converting retirement plan assets from a variable annuity/GIC arrangement, to mutual funds. Approximately 30% of participants are invested in the GIC. Employer can avoid paying a large surrender charge under the GIC only by moving GIC funds to a money market two months prior to the conversion date. Employer has calculated that each of the 500 or so employees invested in the GIC will lose approximately $10 in earnings during the 2 month holding period, and would like to make a $5,000 restorative payment to the plan to make them whole. Employer would not treat restorative payment as a deductible plan contribution, just as added earnings under the plan. Employer will comply with blackout disclosure rules.

Is a restorative payment of this type permissible? Can it be reported on Form 5500 in a way that does not invite an audit?

[Bird]

I'm not sure of the technical terms but I think you'd have to have a fiduciary breach of some sort to allow that kind of restorative payment. Otherwise it's a contribution.

Treating it as a contribution might not be so bad, if they're all or mostly NHCEs you should pass the general test. Of course you need special document language to allow it; which can be problematic if you're using a prototype and can't make any changes without voiding the ability to rely on the prototype FDL.

[Effen]

I agree with Bird (do you play the sax?). Why wouldn't the client want to take credit for it as an employer contribution?

I had a very similar situation where the ins. co. charged a 5% expense for surrendering the GIC. The employer made a corrective contribution to restore the balances. The plan was amended to handle the allocation of the “special contribution.” We “general tested” it and it passed easily.

[Christine Roberts]

Thanks for these comments - an employer contribution would not work because only about 30% of total participants were invested in the GIC.

One suggestion I have seen elsewhere on these boards is to pay the affected participants the difference in cash, outside the plan, and subsequently allow them to make an extra deferral under the plan.

[Bird]

Christine, unless there's more to it, the fact that only 30% of the participants were invested in the GIC doesn't mean it can't work. If they're all NHCEs the extra contributions can't be discriminatory; if there are some HCEs the contribution is subject to general testing which may or may not work or be worthwhile.

Yes, you can have the employer just throw some money at them outside the plan. That's probably the best practical solution.

[Christine Roberts]

Thanks - and is your moniker related to jazz (as suggested earlier) or the late, great Boston Celtics?