Self Correction possible?

[J Simmons]

401k PSP gives EEs self direction opportunity, including choice of brokerage house where a plan account will hold an EE's benefits.

EE has a plan account at one brokerage house, wants to transfer to having at another one. EE calls and sets up the account, distinctly recalling that he told the new brokerage house rep that it was a 401k FBO account that was what was needed.

New brokerage house sends out confirmation of establishment and number for new account, but as an IRA.

Lay trustees don't realize the difference, and sign a transfer form for old brokerage to transfer the assets to new brokerage house, giving the number of the new account (i.e., the IRA number), but specifying in the transfer form that the new account is a 401k Trust FBO account for this EE.

The money transfers.

When the ER next makes a company contribution, the share allocable to the EE is sent to new brokerage house, which refuses the contribution saying it exceeds the annual amount that can be added to an IRA. That's when EE, ER and lay trustees realize that something has gone wrong.

Can this isolated, one time problem with one EE be corrected by self correction or does this require VCP submission? Does anyone know off the top?

[Guest Sieve]

John --

Are there documents setting up the new accont, and did the brokerage properly estalish the account (since it would seem strange to me that it was established without written authoirzation)? If they set it up wrong, I would just have them change the designation on the account.

Were these [iRA] assets included on the Form 5500? Was the employee 59-1/.2 when the transfer took place?

[J Simmons]

Are there documents setting up the new accont, and did the brokerage properly estalish the account (since it would seem strange to me that it was established without written authoirzation)?

There are documents setting up the new account. The EE did not understand the difference between a 401k PSP FBO account and an IRA. The documents were for an IRA. Once set up, the EE contacted the ER's CPA and gave the CPA the account number for the new account (the inadvertent IRA), without providing the CPA any paperwork re the account--just the name of the brokerage house and the number of the new account (the inadvertent IRA). From that, and knowing the EE's name, the CPA prepared a transfer authorization that listed the title on the new account as "XYZ Corp 401k PSP FBO Jane Doe". This transfer authorization, as so filled out, was then presented to the lay trustees, who signed it. Then it was sent to the old brokerage that forwarded the funds to the new brokerage, with the title and account designation. The new brokerage deposited the received funds into that new account, i.e. into the inadvertent IRA.

If they set it up wrong, I would just have them change the designation on the account.

The EE, the ER and the lay trustees are all in agreement and willing to sign whatever to effect that change in designation on the account.

Were these [iRA] assets included on the Form 5500?

No. No f5500 has yet been due as this new account was set up and the transfer occurred in early 2009 (calendar plan year).

Was the employee 59-1/.2 when the transfer took place?

No.

*****

Thanks, Larry. Do you think with these added facts that VCP is necessary, or self-correction via changing the designation on the new account?

[Bird]

The EE did not understand the difference between a 401k PSP FBO account and an IRA.

Correction. The broker didn't understand the difference.

You may find it less-than-easy to get the brokerage firm to fix it, even though it is their fault. You'll have to go up and down 3 or 4 layers to the dreaded "legal department" who will get a corrupted message like the party game where something gets whispered in each person's ear, and it will come out "someone wants to move an IRA into a plan, can we do that?" And the answer comes back "sure, fill out the rollover paperwork."

I've been there. I think once I got the brokerage firm to fix the error by re-running everything back as if it had never happened. Another time, I got so frustrated I had them do it as a rollover from the IRA to the plan, and just treated it as if it had been in the plan the whole time, and hoped to be able to explain it later as "no harm no foul" if it ever came up on audit. And didn't do anything through VCP.

[Guest Sieve]

This was an error. Besides, the E'ee is not 59-1/2, so no distribution was ever intended by the Plan--no distribution paperwork was prepared, no 1099-R was issued, and transfer was intended by Plan to be to a 401(k) brokerage account.

I agree with Bird on both counts: VCP not necessary, and you will have difficulty getting the brokerage to correct--I've been through it, too.

[J Simmons]

Thank you, Bird and Larry. I appreciate your input.