Late Deposits: Terminate Client?

[Guest padmin]

We have a client that consistently( for two years) has made late 401(k) deposits( on average 1 month from the maximum statutory limt). The late deposits have been reported on the 5500, we have a a large amount of correspondence with the client on the issue but the 5330s and earnings makeups have not been done. The client is very profitable and has no other issues other than the one mentioned. Would anyone out there terminate this client? What liability do we really face given that we have no control over the timing of deposits? Any input would be appreciated.

[WDIK]

The client is very profitable and has no other issues other than the one mentioned.

If I were in your position I would:

1) Maintain documentation of the correspondence already provided.

2) Emphasize in writing the penalties and other potential liabilities.

3) Include in the correspondence a cost analysis for the client's actions. (More than likely the client is profitable because they don't waste a lot of money.)

4) Consider myself lucky that there are no other issues.

That being said, of course you have to be comfortable with your clientelle.

[E as in ERISA]

Are you simply a recordkeeper or are you a trustee?

[stevena]

We track all of these late deposit earnings as receivables on our annual report. We have had a few clients that have 3 or 4 years earnings as receivables on their annual reports. They did eventually pay when they see its not going away.

[mbozek]

K- why is there a distinction between a recordkeeper and trustee? Institutonal trustees who hold plan assets disclaim any responsibility to collect contributions under the terms of the agreement with the plan sponsor. The trustee would be liable for the failure to collect contributions only if the plan or trust agreement requires that the trustee collect delinquent contributions.

[Guest Pensions in Paradise]

I would give the client a deadline to file the 5330's and contribute the lost earnings. If they haven't corrected the situation by the deadline, then I would cancel our services.

For our clients, we generally give the ultimatum after two years of late deposits. During that period we repeatedly inform the client about the deposit requirements and the consequences of late deposits. If they have not cleaned up their act after two years, we let them go.

[Guest padmin]

We are not the trustee or recordkeeper. We provide third party compliance( ADP ,5500 etc.) We have not reported the earnings as a receivable, although I feel that it should be. Computing the earnings would take time that we would probably not get paid for.

Thanks for everyone's input

[GBurns]

I am curious as to why it matters, to a RK, administrator or other service provider, that the client does not make deposits timely, or perform any other advised act?

Is there liability for the actions of the Plan Sponsor/Employer? I thought that the service was to provide the advice or to fill out the forms etc. If the PS/employer does not heed the advice or make any remittances needed, Why is that a concern, except from an ethics point of view?

If a tax preparer fill out the tax forms for a company and individual, and then that company or individual either does not pay the taxes or does not file the forms, there is no liability on the part of the tax preparer.

If an attorney arranges a settlement and his client never send the payment stipulated, the attorney is not liable.

Why then would record-keepers and service providers be held liable for the actions of the PS/employer, after the advice etc is duly given?

[E as in ERISA]

If he's a recordkeeper, I would think that there is no risk. If he's a trustee, there is risk that I hope would be mitigated by the nature of the relationship and the contractual terms. But there is a difference. I would be more concerned about terminating the relationship if I were a trustee. There is a lack of guidance about what a trustee does in this situation. Compare the recent Field Assistance Bulletin on employer stock. It suggests that a directed trustee's primary responsibility is to make inquiries of the fiduciary when there appears to be a violation of ERISA. But some of the answers are in development in courts.

[mbozek]

A trustee can only be a fiduciary for a duty that the trustee has assumed, e.g, investing plan assets, because a fiduciary duty is a voluntary relationship. A trustee does not assume a fiduciary duty to collect contributions because the trustee has agreed to hold assets for a plan where the trustee has disclaimed any responsibily to collect contributions.

[Guest Pensions in Paradise]

As a TPA, am I liable if a client does not submit their contributions on time? No.

As a TPA, am I liable if a client refuses to file a Form 5330 or make up lost earnings on late contributions? No.

But just because I'm not liable doesn't mean I shouldn't do what's right. If a client refuses to obey the law, then I am forced to drop that client. Not legally forced to, but ethically forced to. Our society might be a little better off if more people thought that way.

[GBurns]

What do you do when, although the client obeys the law, their actions are questionable? For example would you still keep as a client someone who repeatedly terminates employees for the sole purpose of making them ineligible for an employer contribution of whatever sort, or so that they do not vest, or so that they are ineligible for a pension etc.

When you "do what's right" Who's right is it by?

This is not a personal attack or any sort of attack. I am seriously wondering what people do and why.

[E as in ERISA]

If you want to prevent this in the future, warn the client that there is a $3,000 per participant penalty for making the late deposit. The 401(k) contributions are plan assets as of the date that they should be deposited. Participants' rights to direct the investment of the assets, to take it as loans, and to take distributions on it is temporarily suspended during the period it is not deposited in the plan. They should potentially receive a Sarbanes Oxley 30 day notice about the suspension of rights. There is a penalty for failure to provide notice of $100 per day for the 30 days for each participant. Not kidding. Heard the DOL had taken that position...