Money Purchase Plan Problem

[John Feldt ERPA CPC QPA]

A non-Profit client with a calendar year Money Purchase Plan contributes $1,000,000 during the first 6 months of the 2007 year to fund most of the 2007 expected contribution. But, then they provide a 204(h) notice and execute an amendment to freeze the plan June 30, 2007. We find out about the $1,000,000 being in the plan just recently.

The allocation conditions are 1000 hours only, no last day. So a bunch of people are eligible for allocations, but only about $450,000 worth. That leaves us with a $550,000 problem.

They are nonprofit, so I have no 404 problem. This is not a 415 limit issue either.

This appears to me that it is an operational error. They want to take the extra money out of the plan and put it into a new 401(k). We have told them that without going through EPCRS, we see no way that could be acceptable under the terms of the plan.

Q1. Could they take the money out of the plan somehow and use it in another plan?

Q2. Could they adopt a retroactve amendment, retro to 7/1/07 and only effective through 12/31/2007, to adopt a formula that is X% from 7-1-07 to 12-31-2007 and 0% thereafter? Or would the 204(h) notice requirement be violated by not giving it 15 or 45 days before 12/31/2007 (when the newly adopted formula is zero again)? Could one argue that the formula is currently zero, so no 204(h) notice would be needed to adopt a 6-month formula of X% with 0% thereafter (I think I am reaching for straws).

Q3. I am really stuck, what would you suggest to this plan sponsor?

[ERISAnut]

Since when does making an employer contribution into a qualified plan trust an operational error. That amount, while unallocated, would appear protect from withdrawal by the employer; especially when the fact pattern suggests the employer has had a change of heart.

It is one think to inadvertantly deposit $1 million dollars, and immediately correct the transaction when the documented decision (fact pattern) shows the intent was the deposit only $100,000. It is another thing to prefund the trust for the year and then change your mind. Suppose they were to get sued today, that $1 million dollars would be protected as it is in an ERISA protected trust. That same leverage would suggest they cannot arbitrarily remove these funds.

But, a good option to consider; and I have not researched. This is a pension plan and the employees are entitled to only their accounts under the written plan. So, technically, this plan is overfunded (even though it is not a DB plan). If they were to terminate the plan, there would be a reversion of assets. The employer is tax-exempt, so would they therefore not be subject to the excise penalty.

I am just throwing this stuff out there without any research, there may be tons of holes in this approach, but worth exploring the way the rules are written.

[GBurns]

Isn't this a common problem among well funded non-profits ? How is handled by others?

I do not know anything about this issue except that I have seen and heard of it many times over the years. If I recall correctly it is caused by the midset of spending down before next budget and/or fundraising drive. Cry poor to raise more.

[John Feldt ERPA CPC QPA]

Thanks ERISAnut, I especially like the plan termination scenario thinking.

The reason I think this may be an operational error is because the plan language dictates the amount that the employer will contribute. It does not say it will be "at least" this amount. It states the contribution for the plan year will be equal to ... etc.

Are you indicating that a contribution of about twice the amount required by the terms of the plan would not be an operational error - would it be any problem/error at all (assuming no 404 or 415 problem)?

GBurns: I think that was exactly what happened, then they changed thei mind on where they wanted the money to go, since they wanted to adopt a 401(k) plan.

[ERISAnut]

Are you indicating that a contribution of about twice the amount required by the terms of the plan would not be an operational error - would it be any problem/error at all (assuming no 404 or 415 problem)?

I wouldn't necessarily draw a link between the deposit to the trust being an operational error since it didn't necessarily violate any terms of the plan to do so. However, since it is a plan subject to the funding requirements, it is not subject to any discretion in the funding. In this instance, the employer overfunded, and probably should explore corrections that are used when plans are overfunded.

The thing is, these are typically DB plans. If the argument for DB plans making a contribution that exceeds the "Normal Cost" (or whatever terminology they use) is treated as an operational failure, then I would run with it. But, if not, then I would explore the approach they use. I think the dominating attribute to apply to this correction should be a that it is a pension plan before it is a defined contribution plan (meaning, even though deposited made no one has earned a right to receive it).