Over paid distribution

[Guest johnpetrancosta]

In a pooled investment account, if a participant was overpaid upon terminating, and all reasonable attempts to get the money repaid have failed, which, if any, of the following options are acceptable and or preferable for making the plan and the remaining participants whole?

1. Having the plan sponsor repay the amount plus lost earning? - If this is acceptable, can the sponsor deduct it, and what form does it take?

2. Having the trustees who committed the error repay the amount, plus lost earning, personally?

3. "Transfering" the amount, plus lost earnings from the accounts of the trustees to the innocent participants?

Which, if any (or please provide other), would be required if going through a formal correction program?

[Guest b2kates]

What do you mean "reasonable efforts" were made.

It is always an issue of materiality. In one situation I was involved in, the Bank Trustee was authorized to proceed and sue the Participant.

In another situation, the wrong amount was in excess of 200,000. After much negotiation with theParticipants lawyer, the Bank Trustee ultimately turned the matter over to the Local District attorney for a claim of theft and failute to return property.

If the amount is small, often times the Plans earning are used to absorb the "loss"

[Guest johnpetrancosta]

All reasonable efforts implies just short of filing a lawsuit. A lawsuit is the next step. The error occurred because the trustee/plan administrator transposed numbers (the correct figure was provided to him), to the tune of $12,000 in a plan with aproximately $2,000,000 in assets. Do you really think the DOL will allow the participants to bear the loss? I did not provide that as an option because I was certain that was the one wrong thing to do.

[alanm]

I think either the trustee or the sponsor can make up the loss to the plan for the mistake, depending on the contractual liability. The sponsor can deduct the restitution as a Miscellaneous deduction under section 162. I think this would be considered an insignificant error and IRS notification would not be necessary. The plan could subrogate to the sponsor and the sponsor could go after the recepient in court. The participants should not take the hit for the negligence of the trustee.

[mbozek]

While the plan can sue the participant for unjust enrichment, the plan can only recover the excess distribution if it identifies the specific funds that were paid to the participant that are still in his possession. If the participant took the 12k to Las Vegas and lost it at the craps table the plan has no way to recover the funds because ERISA is a law of equity for which general damages cannot be recovered. I dont see any criminal intent since the plan overpaid the amount without any fraud or larceny by the participant so this is a civil matter, i.e. a dispute over the amount of the participant's benefit under the plan.

[Guest b2kates]

mbozek, in our 200000 situation we were able to pursue criminal charges in that the participant acknowledge the excess receipt and his documented refusal to return the funds.

Short end to story, funds were returned shortly after visiit by police with warrant for arrest

johnpetrancosta: have you amended the 1099 so that the excess amount is not eligible for rollover?

[mbozek]

You were lucky that the participant incriminated himself and that the amount was significant. In most benefit disputes where the plan claims it made an error in stating the value of the account it is impossible to discern criminal intent from a refusal to return funds since there is an honest dispute over the amount of the benefits.

[Guest b2kates]

mbozek, the issue was further clarified when his attorney acknowledged that the funds were in a rollover IRA.

[Guest johnpetrancosta]

If the trustees determine to make the payment themselves, do they actually have to contribute the money, or can they take the write off of the receivable (plus lost earnings) directly to their respective account balances? Is this method of correction unacceptable or acceptable but not preferred?

[mbozek]

Q: Can u get the trustee to make the plan whole for its negligence? Financial insitutions usually have funds for fixing errors to customer's accounts (try customer relations).

If the trustees determine that it is in the interest of the plan to make up the payment instead of hiring a lawyer (because it would cost 12k to sue the participant, then they could make a decision to take the funds from a suspense account or have the employer make a contribution to the plan. Need to see whether this amount would be deductible. Nonalienation rules prevent making the payment from their own accounts.

[Kirk Maldonado]

mbozek:

Different people have different perspectives about whether you can use amounts in a suspense account (presumably reflecting forfeitures) to fix breaches of fiduciary responsibility. Clearly, the more conservative approach is not to do so, but I've heard some pretty convincing arguments that it should be permissible at least in some specific situations.

However, hasn't the DOL taken the position that they won't allow that, at least if you are are trying to gain their approval of the correction of the breach?

[mbozek]

I am not aware of any DOL ruling. Isnt the DOL position a distinction without a difference since most plans permit the employer to use suspense money for either additional contributions or offset future contributions. In other words if the employer cannot use the amounts in the suspense account to repay the 12k overpayment then the employer will contribute 12k to cover the overpayment, reduce the next contribution by 12k and apply 12k in the suspense account as part of the contribution. I thought there were some PLRS that allowed employers to deduct contributions made to remedy a fiduciary breach for plan losses.

[Guest KFM]

I agree that there are PLRs that allow employers to make restorative payments (to remedy beaches of fiduciary responsibility).

The position of the DOL is set forth in Frequently Asked Questions about the Delinquent Filer Voluntary Compliance Program, where it is stated:

Can plan assets be used to pay the civil penalties assessed under ERISA § 502©(2)?

No. The plan administrator is personally liable for the payment of civil penalties assessed under ERISA § 502©(2). Therefore, civil penalties, including penalties paid under the DFVC Program, may not be paid from the assets of an employee benefit plan.

While the position of the DOL isn't relevant in the facts you assumed (involving discretionary employer contributions), the DOL position would become important if it were a frozen money purchase pension plan.