Over-restored Surrender Charge - Do what w/ the excess

[BeanCounterBlues]

XYZ 401k plan transfers from Investment company A to company B. A advises client that the GIC surrender charge is $5,000. B agrees to make up that loss to the affected participants. A liquidates, and wires to B, less the $4,500 charge (read on).

B prices the contract according to the $5,000 charge. Later we find out that A mis-quoted the charge. The charge really only was $4,500. And in fact when the plan's funds were transferred from A to B, A really only did charge $4,500. However B did not find out about this until after it had already deposited $5,000 into the contract as per agreeement.

$500 is now sitting in the forfeiture holding account and B is asking the TPA (me) what to do w/ it.

$500 just so happens to exactly = the GIC surrender imposed by A on a participant that terminated employment and withdrew from A several months prior to the transfer from A to B. It's pretty clear that A mis-stated the contract surrender (A did put in writing that the amount was $5,000).

Should B just pull $500 back out and take it back? They are not willing to re-configure the contract pricing although they state the impact to the pricing of this $500 is "minute."

Or - does this money have to stay in the contract. If yes, then should the money go back to the terminated participant that lost it in the first place? Or, should it be used as forfeitures? Or, should it be allocated to all eligible participants as "earnings?" Or something else?

Thanks for any help.

[Bird]

I'd be comfortable allocating it to all participants (but not the guy who got the distribution earlier) in the ratio that they were hit with actual surrender charges; it's essentially a gain. B is going to recover it over time, so the participants might as well get the benefit of the one-time drop-in.

[Kevin C]

You might want to revisit what you are doing with the entire "restored" surrender charge. IRS Letter Ruling 200317048 addresses a situation where a company wants to reimburse surrender charges. The IRS says it would not qualify as a restorative payment, so it would be an employer contribution.

Reg 1.415©-1(b)(2)©:

© Restorative payments. --A restorative payment that is allocated to a participant's account does not give rise to an annual addition for any limitation year. For this purpose, restorative payments are payments made to restore losses to a plan resulting from actions by a fiduciary for which there is reasonable risk of liability for breach of a fiduciary duty under Title I of ERISA, where plan participants who are similarly situated are treated similarly with respect to the payments. Generally, payments to a defined contribution plan are restorative payments only if the payments are made in order to restore some or all of the plan's losses due to an action (or a failure to act) that creates a reasonable risk of liability for such a breach of fiduciary duty (other than a breach of fiduciary duty arising from failure to remit contributions to the plan). This includes payments to a plan made pursuant to a Department of Labor order, the Department of Labor's Voluntary Fiduciary Correction Program, or a court-approved settlement, to restore losses to a qualified defined contribution plan on account of the breach of fiduciary duty (other than a breach of fiduciary duty arising from failure to remit contributions to the plan). However, payments made to a plan to make up for losses due merely to market fluctuations and other payments that are not made on account of a reasonable risk of liability for breach of a fiduciary duty under Title I of ERISA are contributions that give rise to annual additions and are not restorative payments.