Client did not remit deferrals

[Guest ellah]

Try to make a long story short. We have or should I say had a client that did not make all of the employee deferrals for 3 employees. This isn't the first time this happened. We discovered this issue the first time in PYE 2005. We are the TPA on this case and perform all testing and Form 5500 work at the end of the year. At the end of 2005 we discovered that the client had not made all of the deferrals for several employees. We informed them of the situation and they agreed to make the deferrals and we calculated the gain/loss and the employer made the contributions and we took them through the voluntary compliance program and reported on the 5500 that the employer did not remit contributions on a timely basis.

Fast forward to 2006. We contact them as usual to get their updated census information...they do not respond. Finally they send us 2006 information. We find that again they did not remit the all of the deferrals. We contact them and let them know of the problem (which we believe they were well aware of) and they tell us that they will fix it. We file an extension and send them a letter describing all of the deficiencies and how they must be correct. After repeated emails regarding the need to get this fixed the contact us in late September and want to meet with us. I meet with them and give them a letter stating all of the deficiencies and the cost to correct it all. We also ask for payment in advance before any work will commence. They say no problem you will have the check the next day. October 15th comes and goes..we sent reminder emails with no response and no check. We sent them an email acknowledging that they did not make payment and we did not file the Form 5500. I will be sending them a formal letter telling them that we are no longer the administrator for their plan.

We have never run into this before believe it or not. My question is should we report them to the IRS. Do we face liability if we don't. Several of the employees have terminated and did not receive all of their deferrals. My feeling is we have an obligation to report this to the DOLE/IRS and we could face liability if we don't. What is your opinion and has anyone else gone through this before. How should we contact the DOL...what is involved?

thanks

[R. Butler]

Tough call.

http://www.thompsonhine.com/publications/p...n1191.html#3153

[masteff]

If you have any professional certifications, you might review their ethical conduct codes and see if any of them would make you feel compelled one way or another.

[JanetM]

It is a tough call, but I would make it to save the participants.

[jpod]

You need to review your contract(s)/engagement letters with the client in question, and consult with your own lawyer. I am assuming that neither you nor anyone in your firm who services the client is licensed to practice law. Probably you have no duty to the client to keep your mouth shut, but that's Q #1. Q #2 is whether you have any legal exposure to participants if you keep your mouth shut. I doubt it, but let your lawyer advise you on that. Q #3 is do you care if the fact that you dropped a dime on a client gets spread "around town"? You are making assumptions about what your client has and has not done, which are probably reasonable assumptions, but right now you don't seem to know all the facts, you're only making assumptions. I realize you don't want to spend money on lawyers, but if you are going to take the drastic step of dropping a dime, it would be money well spent.

[R. Butler]

I will add that I'd be more concerned about legal exposure than notifying the IRS/DOL. Depending on the amount its possible that neither the DOL nor the IRS will do anything.

We had a similar situation where the DOL was investigating due to participant complaints. Plan sponsor made some of the employee deferral contributions, but not all. The DOL was aware that not all of the deferrals were made. The DOL investigator handling this case told me that since the amount was under $10,000 that they didn't have the resources to pursue it further.

[jpod]

Butler: Always useful to hear about real cases. Please clarify: Do you mean you'd be more concerned about legal exposure resulting from notifying the Feds or from not notifying the Feds?

[Bird]

I think, as noted by others, that you should review any codes of conduct as applicable and client agreements. Having said that, I seriously doubt that you have any legal obligation to report this to the government and if you do, you're probably exposing yourself to legal action by the client. That's a sad state of affairs but I think that's the case.

[R. Butler]

Butler: Always useful to hear about real cases. Please clarify: Do you mean you'd be more concerned about legal exposure resulting from notifying the Feds or from not notifying the Feds?

I wouldn't be all that concerned with notfying IRS/DOL. I'd be comcerned if I had crossed the line & could somehow be considered a fiduciary. I know that as a general rule TPA's are not fidcuiaries, but that doesn't mean that a line hasn't been crossed somewhere.

I'd also,as several others have mentioned, look at any contract/engagement letter.

[Guest ellah]

Thank you to all that have responded to my post. All very good information. I appreciate the link sent by R. Butler that cites a similar case.

I am wondering if it makes sense for me to notify the paricipant that we paid out to let her know that she didn't receive all of her deferrals. Also let her know that they are no longer a client and finally suggest that if she wanted to persue the deferrals to contact the DOL. Unfortunately we are not talking about a lot of money...maybe $1,500 total....so it sounds like the the DOL would not persue this.

Any thoughts about contacting the participant to let them know the situation?

thanks

[austin3515]

I think Bird's comment applies in the same way to notifying the participant.

[jpod]

My comments don't apply to notifying participants, because I would NEVER UNDER ANY CIRCUMSTANCES go to the participants, except if the DOL forced me to do that.

[PLAN MAN]

Do you provide participant benefit statements for this plan? If you know there are outstanding deposits due the plan, do you include these amounts in the total contributions reported? For the terminated participants, I would think you could show a remaining balance in their accounts.

[John Feldt ERPA CPC QPA]

"My question is should we report them to the IRS."

Maybe I'm skimming the post too much and missing something, but doesn't the 5500 do just that - isn't one of the questions going to point out the late deferral deposits?

edit: typo

[masteff]

"My question is should we report them to the IRS."

Maybe I'm skimming the post too much and missing something, but doesn't the 5500 do just that - isn't one of the questions going to point out the late deferral deposits?

edit: typo

Presuming the employer ever files one or the IRS ever catches the lack of filing and goes back to them.

[R. Butler]

I am wondering if it makes sense for me to notify the paricipant that we paid out to let her know that she didn't receive all of her deferrals. Also let her know that they are no longer a client and finally suggest that if she wanted to persue the deferrals to contact the DOL. Unfortunately we are not talking about a lot of money...maybe $1,500 total....so it sounds like the the DOL would not persue this.

Any thoughts about contacting the participant to let them know the situation?

thanks

I don't really have an opinion on contacting the participant.

To give a little more context on my previous post mentioing our firms dealing with the DOL --

The 2 participants that complained probably were only due about $2,000 each. The plan sponsor did end up contributing the amounts owed them. (I don't recall any gains being added, but its been a few years & maybe gains were added & I just don't remember.) We did not notify those participants; they contacted us. We did not tell them directly that contributions were not remitted, but we did encourage them to compare their pay stubs to their investment statements. We also encouraged them to contact the DOL if they felt that they were shorted contributions. Over the next few months we heard from each of them several times. At some point the 2 participants were told that our records also showed that money was due them, but we always referred them back to the plan sponsor & to the DOL. Eventually their persistence paid off because the DOL did investigate & the DOL did get the plan sponsor to contribute the amounts due for those 2 employees.

The plan sponsor owed approximately another $4,000 divided among 3 or 4 participants. Those participants never contacted us nor the DOL. The DOL investigator did ask us if additional amounts were due for others. We answered truthfully & supplied him with information to verify that fact. Once the money was remitted for the 2 complainers; the DOL investigator told me that the DOL wasn't going to pursue the rest of the money. He said the DOL just didn't have the resources to pursue such a small amount.

The other participants may have very well received their money had they complained vigorously. Kind of like the parable of the persistent widow.

[Guest nmyers]

Well, it seems as if everyone has pretty much got this one covered, but it's not like me not to add my two cents. Working as a TPA, I've run into this situation numerous times. As someone mentioned earlier, the 5500 does specifically ask on both Sch I and H if there were any late deposits. You would answer the question accurately and move on. Let the Feds come, back and ask why there hasn't been a correction. You've covered yourself, by telling the client of their error, and what they need to do to resolve it. Contacting the participant is not an option. The Employer afterall, is your client not the individual participant. Most credentials rules of conducts, only mention that is your duty to educate your clients within the guidelines of the law, nothing is mentioned about becoming a snitch.

My former employer was a CPA firm, that owned a TPA entity. We had a client who refused to fund their 3% Safe Harbor contributions. After instructing the Employer on every law in the regs known to man, and informing them of all consequences that they might face with the DOL, my boss decided to drop that Employer as a client of our firm. His point of view is that we fulfilled our professional responsibility and if they weren't going to take our advice then they were voluntarily ending our professional relationship. I believe my boss made an excellent decision.

You also have that right. The DOL might be so bogged down with all the large corporations robbing their participants that small dollar amounts may not be cost effective for them to go after. I think someone on the message board mentioned that $1500 or $2000 really isn't that much money. I would also agree, that no, it's not a lot of money. But it could be valued as much as $50,000 to a participant who was struggling to put anything into their retirement account. Those folks should not be discounted just because the contributions weren't $15,500.

In a very long and drawn out way, I'm basically saying, complete the 5500 accurately. Let the Feds deal with them if they so choose, and decide whether or not if this is a client worth keeping. I'm sure you can find more clients who want to follow the law rather than those who don't.

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[Tom Poje]

I can not tell from the data provided, however there may be even bigger problems. (besides the issue of late deferrals being treated as 'loans' and all the stuff with filing the 5330 and stuff)

for example, if deferrals were taken out in 2005 and never deposited until 2007, then they would be treated as nonelective contributions and not used in the ADP test. if they involve HCE deferrals then you have to worry about discrimination testing on the a(4) side rather than ADP tesing.