Distribution checks deposited in employer checking account

[Guest 5500]

I feel this is a problem but since I see it so often I wonder if I am wrong.

Many small plans have no checking account or money market account available for writing checks. The brokerage makes participant distribution checks payable to the trustee but tells the trustee to deposit in the corporate checking account and then to draw corporate checks to the participants.

I don't like the idea of plan assets being deposited into the employer's checking account. Am I wrong on this, and if so why?

[E as in ERISA]

It might be okay to have the employer draw the checks first and then have the plan reimburse it immediately. That is a possible interpretation of PTE 80-26, that would allow interest free loans from the employer to the plan for operating expenses including distributions. There is a proposed amendment to eliminate 3 day rule. http://a257.g.akamaitech.net/7/257/2422/06...df/04-27451.pdf

[david rigby]

Many small plans have no checking account or money market account available for writing checks.

Just because there is no account does not mean it is not available.

[Guest 5500]

PAX:

Assume that the client does not want to open the separate checking or mm account if not necessary. This practice seems to me to be quite widespread and I am simply wondering about others' opinions on the question above.

[david rigby]

I recognize that it happens with many small plans. IMHO, it is a practice that should be avoided. It's just too easy to make a mistake, and too easy to have a separate account to avoid that mistake.

[Guest b2kates]

why not have a MM with the broker or mutual fund?

[SoCalActuary]

For distributions where tax withholding must be administered, the employer is simply acting as the agent for payment, with the 1099, 945, etc., all showing the employer's tax ID.

However, the employer is clearly acting as a fiduciary and has a duty to act promptly on behalf of the plan participants, a duty that is sometimes neglected.

[Alan Simpson]

Why can't the brokerage just make the net check payable to the participant? They may want a letter signed by the Trustee indicating who the check should be maid payable to.

[mbozek]

Because the brokerage will only issue a check to its customer, the plan trustee, under the terms of its custodial agreement. If the trustee wants to issue checks for distribution payments then it has to open its own checking account or mm fund. For liability reasons the custodian does not want to be the payor of plan distributons liable for income tax withholding and reporting of plan distributions. I was involved in a case where the the estate of a deceased trustee of a retirement plan was subject to a tax lien for tax witholding and penalties because the trustee had endorsed checks for plan distributions issued to the trustee directly to the participants without withholding applicable taxes.

[Guest 5500]

mbozek:

Just to make sure I understood, you are agreeing that the funds should not be deposited into the corporate account, correct?

[Bird]

The custodian SHOULD be able to write a check to the participant, or whomever the trustee wants, under a properly drafted letter of instruction; you may have to add language that holds them harmless from any tax, reporting or other issues arising from the distribution. If there is a custodial agreement that says otherwise, so be it; I'd file that away in my memory bank and steer future clients away from that firm if possible, or charge extra for the hassle of dealing with them.

Also, I wouldn't necessarily accept the first answer I get, especially if it's from the broker. FWIW.

[Bird]

I should have added that if the brokerage firm really can't (or won't) write the check to the payee as desired, and there is withholding, then you should ask them to write two checks - one for the net amount, which can then be endorsed and given to the participant, and one for the taxes, which can be endorsed and deposited to the business account; then the business writes an identical check to the bank and makes its tax deposit.