Distribution made directly from Employer and not trust

[jkharvey]

We have a SH 401k plan. Several terminated participants need small contributions for the 3% SH nonelective. Some in our office suggest having the Employer make this contribution as a payment directly to the employee rather than deposit into the trust then make the distribution. The reason they are giving is that we can avoid having to open an account at the investment company (platform type investment at Hartford/Nationwide/American Funds, etc). This makes me nervous but I need to provide "some really good reasons" not to do this. Can you lead me to specific cites for this either way?

[Bird]

Some in our office

It's disturbing that there's (apparently) more than one person in an office that (apparently) does TPA work that would think this. I mean, it's a very logical way to look at it but anyone who's been in this business for any length of time knows that you can't thnk that way.

Anyway, you can't do it. I don't know what to cite but you haven't made a contribution and you haven't made a distribution.

Might you "get away with it" in an isolated case? Possibly. No way would I make a habit of it.

[Guest SusanE]

All assets of a qualified plan must be held in a trust for the exclusive benefits of participants. (If you want codes -- IRC 401(a), Treas. Reg. 1.401(a)(3)..)

The non-elective contribution won't be recognized as a qualified plan contribution unless it hits the trust -- nor will the employer be able to take a deduction on the contribution.

There aren't any work-arounds for account or distribution fees. Best you can do to avoid this in the future is look at eligibility and participation rules in the plan.

[austin3515]

LEgally, the money is owed to the PLAN, not the employee. The Plan in turn has an obligation to the Participant. Giving the money directly to the participant does nothing to satisfy the obligation owed to the Plan. No specific site will exist saying that you need to follow the terms of the Plan (actually, that's in the 401(a) somewhere).

In the Original Posters defense, it sounds like he works for a company sponsoring a plan, not a TPA.

[wsp]

If the plan has a non-interest bearing checking account you can put it in there and then pay out the participants without setting up the accounts at Hartford/Nationwide/American Funds. But, in doing so the plan sponsor will be obligated to prepare the 1099-R's that would otherwise be prepared by the recordkeeper. In addition, the person responsible for the 5500 would also have to be aware of this account AND that there are distributions paid from it so that the distributions can be included on the filing. Because it's non-interest bearing I would never leave the money in there for more than a day or two...otherwise it could be argued that it should be interest bearing.

[jkharvey]

Thank you. I've resolved the issue and convinced all parties involved that this is not the way to go. I suggested the separate "checking" account outside of the platform investments.

[Bird]

Sorry if I misread the situation.

But now I have to wonder out loud why/how it is easier to open a checking account, deal with recordkeeping issues associates with it, and have to prepare 1099s than it is to open an account and let the recordkeeper deal with it?

[austin3515]

Amen to that Bird!