plan money used to pay company debt....or was it

[Santo Gold]

Company withholds 401k money from everyones paycheck, but does not deposit the large 401k amount for the owner ($3,000). This amount stays in the company's business account, and is later used to pay off a company debt. This is discovered a year later.

We have a late deposit problem. But is there also a problem with that $3,000 being used to pay off a non-plan expense?

YES: Its a prohibited transaction, using plan money to pay non-plan expense.

NO: The money never left the company account. Therefore, it was not a plan asset and so it doesn't matter what it was used for. The late deposit penalty is all that is imposed.

Any thoughts/opinions?

Thanks

[WDIK]

But is there also a problem with that $3,000 being used to pay off a non-plan expense?

How can it be determined that this specific $3,000 paid the expense?

[masteff]

Too true. And even if it was the very last $3000 of cash that the company had and they had no other cash after paying the expenses in question, was it a plan asset if it hadn't been separated from the company's general account?

[PLAN MAN]

According to the DOL: the assets of a plan included amounts (other than union dues) that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his or her wages by an employer, for contribution to a plan, as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets

Is there really any doubt these funds are considered a plan asset as soon as the other amounts were deposited in the plan?

[masteff]

Is there really any doubt these funds are considered a plan asset as soon as the other amounts were deposited in the plan?

Ah, I re-read the first sentence of the original post... all other contributions were funded, just not the owner's. I w/drw my previous question. I think it's time to send the owner to an ERISA atty.

[Santo Gold]

It is high time you contact the concerned authorities to answer this question and i little bit fishy with your question.

Canadian Money Blog

Definitely a problem here, but I'm trying to determine if its a plan problem or a company problem. Certainly a late deposit problem for the plan, but does it end there for the plan?

[Bird]

I see it as a late deposit. Period. If it's not repaid then it goes deeper but I don't think it's relevant that the employer happened to pay off a debt in the same amount.

[Steelerfan]

How can this be anything other than a violation of the plan asset and exclusive benefit rules?

People may try to argue that as the owner, the the plan asset reg doesn't apply because there is no "withholding" per se. But more and more courts are holding that unpaid contributions that are owed to a plan are credits to the plan and are therefore plan assets. No other result makes sense--you could too easily skirt ERISA's protections by never actually contributing to the plan?

In the recent case of United States v Jackson (US Ct of Appeals 4th Cir 2008), two individuals were convicted of theft of contributions under ERISA for amounts that were never contributed to a pension plan but were due and owing. I think this would be applicable in the 401(k) context as well.

[masteff]

Ah ha! Santo - you should look into the DOL's VFCP (Voluntary Fiduciary Correction Program). http://www.dol.gov/ebsa/compliance_assistance.html#section8

http://www.dol.gov/ebsa/newsroom/fs2006vfcp.html

On the excise tax, it talks about a class exemption that applies to failure to timely remit participant contributions. If your client qualifies for it, I'd document the heck out of the correction and go w/ that. The client needs to fix the problem anyway, so if it can be done in a way that satisfies this, all the better.