Correction by TPA

[rlb64]

TPA decided to take responsibility for corrective contributions due to mishandling ADP tests. TPA deposited corrective contributions directly to the trust.

It's my understanding that corrective contributions are normally deductible contributions unless the correction is a "restorative" payment such as restoring investment losses.

Can someone help me sort through the implications of the TPA making this nonrestorative correction on behalf of the employer?

[EGB]

I generally have the same issues and questions. Isn't there someone out there who has had these issues?

1. Can a third party make a contribution to a plan? Or, must the third party make a taxable (probably grossed-up) payment to the plan sponsor or other participating employer, who then can make the contribution? Please assume that the payment is a contribution and is not a restorative payment and that no breach of fiduciary duty has occurred

2. Is the contribution deductible by the third party under Section 162, whether made to the plan or to the plan sponsor?

Any help would be appreciated.

[Kimberly S]

I don't have any citations to back up my recollection, but I believe that only the plan sponsor is permited to make a contribution to the plan. The TPA should be reimbursing the plan sponsor, not depositing directly to the plan. That would also allow the TPA to deduct the payment as a business expense. It clearly is not a pension contribution for the TPA's business.

[PLAN MAN]

What exactly do you mean by "corrective contributions"? What corretion is being made here? Did participants receive refunds of excess contributions due to the results of the flawed APD tests?

[Guest dbvail]

Wow, where did this go so wrong?

Seems to me there are many problems here. But to boil it down, there is the exclusive benefit rule. So how can the TPA, who is not the employer, contribue to a plan? Much less deduct it? Fundamentals are the key.

The employer failed to operate the plan correctly and is therefore liable to make whatever corrections are needed. To the extent the TPA can be convinced to reimburse the employer for the expense, fine. But I can't for the life of me see where the TPA can put money in a plan (other than the TPA's plan).

I applaud the TPA for owning up to an error (our business is wicked complicated), but the deposit can only come from the sponsoring employer. Unless I am wrong.

[Bill Presson]

I would have done it like this: Employer makes plan whole; TPA reduces fee to employer in equal amount to make Employer whole.

Not that I have any experience with having to fix problems that were my fault.