Prohibited Distribution of Deferrals

[Below Ground]

Having researched this topic, I still find myself without a "good answer". Any comments or suggestions would be greatly appreciated.

Participant in his 30's decides he wants to take his salary deferral money out of the plan and invest in an IRA that has no connection to the Plan, which is a 401(k) Plan. This is not a Hardship, or any other legitimate distributable event. The person just wanted the money, and the plan administrator allowed the payment because "it was the person's money".

Subsequent to this payment, another person (30 something) decides that getting her money out would be wise, given the investment results being realized. Again, no valid distributable event. Since the guy got his money, why not her?

Unlike distribution #1, the plan administrator came to us to request election paperwork for this distribution #2. After hearing the details, and the "justification" created by distribution #1, we explain that the distribution is not allowed. While distribution #2 was stopped, we still have the problem of distribution #1.

Now the problem is how do you fix distribution #1?

[K2retire]

It wasn't the participant's money -- it was the plan's money. As such the plan fiduciary has a duty to obtain the return of the inappropriately distributed money. Of course, we both know how likely that is to happen.

If I remember correctly, distributing deferral money without a distributable event, particularly to someone under age 59 1/2, is a potentially disqualifying event. There is a nearly forgotten situation in my distant memory that causes me to suspect that the employer must make the plan whole if it can't be collected from the participant. But the blatant unfairness of that possibility makes me suggest consulting an ERISA attorney for a better answer.

[Below Ground]

Thanks for the reply K2. Just some thoughts I wish to share with you.

I found an old post related to this topic that referenced a communique on the EPCRS. In summary, this event was discussed as a sample of a problem, but there was no discussion on what the solution was in that "government issued guidance". That poster complained that there was not much help there!

Anyway, I suspect that TPA's are going to see this problem happen more and more. Unless you literally sit in the office of each client, this is very likely to happen. Why? No matter how often you tell people that monies can't just be paid out whenever the person wants, there will be the person who concludes that NOT paying the money is wrong -- it being the person's monies. :angry:

Rules and Regs say different? You and I know that and care, but not every "plan administrator" will be disposed to follows those Rules and Regs. The question becomes what should we as advisors do?

[masteff]

Sorry for asking an obvious question but since you mention EPCRS... they've updated that document roughly annually, so it's more useful as an actual tool than it was some years ago... have you checked what the current document says?

[BG5150]

K2:

If and when the employer makes the plan "whole," how does it do that? Does the money go back into the participant's account? Sitting there accruing tax-free gains (or lossed), and then he or she will be entitled to that money again in the future?

[Below Ground]

Masteff. The current document does allow for more guidance under "Overpayments". You are correct and I should have looked more deeply there. I note that I have since had help from another source who has proven very helpful indeed! I'm not sure if that party would like me to name names, so I will refrain beyond saying I got some very valuable help!

K2. That becomes a problem.

[Below Ground]

K2 I had to run out so I couldn't reply properly to you. I figure that since people spend time answering my questions, I should do my best when I can answer a question. Anyway...

It is my understanding that you use the Overpayment Rates that the DoL publishes to compute interest needed to make the plan "whole". I also understand that you can use the DoL Calculator as applied to late deferral interest to compute this value. While I can't support this 2nd option, it is my "belief" that this would be acceptable.

Hope that this helps you. Again, sorry I could not reply earlier.

[J Simmons]

Below Ground,

Without naming names, can you relay to us what directions the valuable help guided you towards?

[Below Ground]

Go to the ASPPA Members Page and check out the discussion forums. While I am fairly certain that the source of help for me won't care, I always try to not impose on anyone. Let me know if this doesn't help.

Oh, check Section 5.01(3)© of the EPCRS Procedure.

[K2retire]

K2:

If and when the employer makes the plan "whole," how does it do that? Does the money go back into the participant's account? Sitting there accruing tax-free gains (or lossed), and then he or she will be entitled to that money again in the future?

I was deliberately vague earlier, because I didn't trust my memory and hadn't taken the time to look it up. The response on the ASPPA forum is what I remembered -- the money goes back to the participant's account. As for earnings, I don't know.

Notifying the IRA institution that it was not eligible for rollover was a brilliant way to encourage the participant to return it to the plan.

[Below Ground]

Rates are found under Rev. Rul. 2008-54. I believe these rates are referred to under EPCRS.

Oh yeah, thanks for your replies and input to all!