Correction Procedure for Improper Contributions

[luissaha]

Through a payroll audit a large multiemployer defined benefit plan discovered that a participating employer was making improper contributions to the plan for several years. It appears that the employer was requiring employees covered by the CBA to "elect" to participate in the plan and then was taking money from those employees' checks on an after tax basis to make contributions to the plan. The plan does not allow for acceptance of any kind of after tax contributions.

Obviously, the plan can no longer accept these contributions. My concern, however, is what the plan is required to do with those contributions it has already received from the employer. Can the plan simply refund the contributions to the employer and notify the participants about what happened and inform them they have not accrued any benefits under the plan? Should the plan approach the IRS regarding the proper correction procedure?

Any thoughts would be greatly appreciated.

[Effen]

I'm not a lawyer and you need to have the fund's lawyer handle this.

First, I am surprised this could happen. Did the employer really think these contributions should come out of the employees wages? Didn't the employees say anything when they figured out the employer was shorting their pay checks?

That said, it seems to me that you must refund the employee deferrals because the plan can not accept them. You might also consider refunding them with interest, but that might also require you generate a 1099 if the interest is taxable.

inform them they have not accrued any benefits under the plan?

I disagree - the employer still owes the contributions under the collective bargaining contract and the employees are still entitled to the benefit.

It sounds like basically the employer stole the money from the employees in order to satisify his obligations. Once the money have been returned, his obligations still exist.

This sounds like a real mess.

[luissaha]

I agree that this is a mess. I'm not sure, however, that the employer owes the contributions under the CBA. Believe it or not, the CBA actually implies that the contributions would be taken from the employees' wages on an after-tax basis. If the plan tries to recover the contributions from the employer, I'm sure the employer will argue that the CBA required after-tax employee contributions. He was not obligated under the CBA to make the contributions on the employees' behalf. Now that the plan discovered it cannot accept these after-tax employee contributions, there is no requirement that he make the contributions to the plan. The administrator should not have accepted a CBA with this language, but he did. I'm just not sure the plan could prevail in a lawsuit against the employer to recover the contributions when the language in the CBA seems to call for after-tax employee contributions.

[Effen]

The lawyers will need to sort this one out.

Good Luck.