Contributions Made to Wrong Accounts!

[Below Ground]

We recently took over a case that incorrectly allocated the profit sharing contribution to member accounts. While the total amount is fine, there are small errors given a misapplication of the Plan's allocation formula. (The errors are small $100 here, $50 there, $25 there....) In addition, members have separate, individual investment accounts; meaning a "physical move" is needed to correct the errors.

I believe that since the errors are "small" in dollar terms, SCP can be used under EPCRS. The question is, how soon do physical transfers need to be made. The Client would like to make adjustments within the next year's deposit of profit sharing, that will be for 2008 but will actually be deposited in early 2009. The Plan uses the calendar year and the errors were in deposits made in 2008 for 2007.

[Below Ground]

I'm pretty sure it would be by the close of the 2nd year that follows the year of defect. That's my read of the "SCP Rules". Anyway, I was looking to get confirmation, or correction, toward my understanding.

[Guest Sieve]

Depending on how many participants this impacts, and the total amount of the errors, at worst this is a significant operational failure and correction must occur, as you suggest, by the end of the 2nd year following the end of the plan year with respect to which the failure occurred. Apparently, the failure occurred with respect to 2007, so the correction would be required by the end of the plan year in 2009.

This is, probably, an insignificant failure, for which there is no time limit for correction. But, of course, the sooner the better (so an audit will not be a problem).

Check to see if the de minimus rules would somehow eliminate the need for correction entirely. Check the new EPCRS, because I think some of the de minimus amounts were increased. (Of course, even if you are under the de minimus amounts, you still may want to correct to be fair to all participants.)

[Below Ground]

Thanks Sieve. I really appreciate your thoughtful reply. I intend to take a very cautious approach and have client correct ASAP. In fact, my reason for the post was that I felt uncomfortable with waiting until early 2009 as desired by the client. You have helped ease my mind that this should be okay, since the close of 2009 really is the deadline. Again, thanks!

[Guest Sieve]

BG -- DON'T wait until 2009. DO IT NOW if at all possible. Plan audits have a way of happening at the most inopportune times.

[Below Ground]

Agreed 100%. I will tell the client they should do NOW, but if they choose to wait at least I can take some comfort in that "SCP Rules are not being broken". I have no intention of telling them that they should wait. Instead, I will know that they can and be "okay"; assuming no audit between now and then. In effect, I will provide "full disclosure" but they must choose when they will follow my advice. I suspect I will have them execute something saying when the correction will be made and that I have advised them to do now. Again, thank you very much.

[Peter Gulia]

Below Ground, along with the considerations mentioned above and others that you've likely thought about, consider asking your client to think about what would happen if, between now and the next allocation time in 2009, a participant leaves employment and claims a distribution. If a participant was allocated less than he or she was entitled to, is the employer ready to top up the account before the distribution is paid? If a participant was allocated more than he or she was entitled to, will the employer succeed in removing the excess amount from the account before the routine processing of the distribution claim?

[Below Ground]

Excellent points, Peter. They will, however, not sway this client. They want to deal with employer allocations once per year, and that is it. Unless forced by law or the like, they simply will not budge!

Luckily, this specific client has had zero turnover in the last few years, from what we can see. Otherwise, the points you raise, would be a concern for us. Please note that I said us, and not them (meaning the client). As I am sure you know, some people believe that they can just do as they please! My daddy did it this way, and so will I.....

They don't look like they will be a bad client, but they are set in their ways. This has been stated to me in no uncertain terms. Unless I can say "this is required", they won't budge.

Regardless, thanks!