Trouble Distributing Benefits

[Dougsbpc]

In the old days (5, 6 years ago) when a participant terminated employment, a plan trustee could simply send an instruction letter to the investment provider and it was honored.

We now have a small DB plan termination with all benefit elections properly executed. We would like to prepare an instruction letter for the trustee to sign and forward to the investment provider. The letter would say please make a check payable to XXXXX Trust company FBO Mary Smith etc. However, the investment provider is telling us they can only make checks payable to the trustee. They then recommend these checks be deposited into the corporation checking account and then disbursed to participant's or their IRA's.

We even offered to have a signature guarantee on the trustee instruction letter, but the investment provider will not accept that.

Anyone run into this situation? Seems not right to deposit plan money in a corporation account and then make distributions.

[Belgarath]

We've run into institutions only making checks payable to the Trustees - but never had them suggest that they deposit it into a CORPORATE account. I agree with you - they should set up a trust checking account. We always encourage them to do this anyway when they establish a plan, but they rarely listen...

[david rigby]

... to prepare an instruction letter for the trustee to sign and forward to the investment provider

Shouldn't this letter come from the Plan Administrator?

[Bill Presson]

We've had this issue. The client ended up telling the investment advisor to make out a check to the Trustee for the entire account and put the money with a different investment advisor

[K2retire]

... to prepare an instruction letter for the trustee to sign and forward to the investment provider

Shouldn't this letter come from the Plan Administrator?

As an investment company recordkeeper, we require the signature of the trustee because that is who is our client. We make the check out however the trustee directs and send it to the plan administrator to record and distribute.

[Below Ground]

We have this specific "problem" with one investment provider that we work with. I recall that in the Defined Contribution Plan Series used for ASPPA Exams, this issues was actually covered. (When I have more time I will try to find exactly where (Volume 2 or 3, I think), but the issue was involving the processing of withholding taxes.)

Anyway, it was deemed to NOT be a prohibited transaction if you used a company account as a "pass through" or "agent" for processing. In other words, if the money is deposited to a company account and immediately processed out (2 or so days), that would not be a problem.

Found it. Page 9 - 23 of Volume 2. "The employer can act as agent of the payor in making distributions. ...may transfer funds to the employer, and the employer makes the distribution." "Although this arrangement is described in the cited regulations, IRS officials have informally expressed the opinion that such arrangement is not an appropriate method...." It goes on to say that this is fine for withholding according to the IRS.

Grey? How often do we see that?

[GMK]

OK for withholding, but I vote for Belgarath's approach for distributions in such cases:

- they should set up a trust checking account.

[Dougsbpc]

Thanks all for your insight.

I cannot imagine that simply using the corporate account as a mechanism to distribute benefits should be a problem. Especially if checks are made payable and sent the same day the deposit to the account is made. I don't believe their corporate account credits interest, so how would the employer be benefiting from this transaction? It seems like a lot of work and hassle to set up a separate account in the name of the plan just to distribute benefits.

[K2retire]

Thanks all for your insight.

I cannot imagine that simply using the corporate account as a mechanism to distribute benefits should be a problem. Especially if checks are made payable and sent the same day the deposit to the account is made. I don't believe their corporate account credits interest, so how would the employer be benefiting from this transaction? It seems like a lot of work and hassle to set up a separate account in the name of the plan just to distribute benefits.

It is a lot of work and hassle. But so is explaining to an auditor why plan benefits were paid back to the company which is what your paper trail would show otherwise.

[Below Ground]

GMK - I was not advocating any position. I was simply noting what an ASPPA Publication stated on this issue. I can also tell you that I have had plans that did this and then went go through an IRS Audit without problem. I should note that I did not advocate the method then. It was a takeover plan that was already using the practice.

It seems that the key point is (as raised by Dougsbpc), don't have a benefit for the employer. Again, I am not advocating use of this practice. I am just saying it is done, ASPPA's Publication did discuss it, it was used as an example in cited regulations, the IRS says they don't like it, and in my personal experience it has been used without problem.

Keep in mind that the paper trail would also show the money immediately leaving the account of the firm, as required for "agent status". I wholly agree that if the transaction is shown to be done for the benefit of the firm, you have a big problem.

If you do have this need, the approach I would advocate would be use of a checking account that is owned by the trust fund, as posted by Belgarath. There are some minor operational problems with that approach, but clearly it does not involve the exposure potential under the "agent processing".

Anyway, that's my 2 cents.

[masteff]

If you do float it thru the corporate account, I too would strongly suggest that the distribution to the participant be processed and posted on the same day as the check is deposited (even if you have to hold the check in your hand for a day or two so the deposit can clear and funds be available to cover the check). This way your paper trail shows the plan sponsor didn't gain a benefit by use of the trust's funds (such as by using them to cover other payments and later paying them back out of other deposits).

But if its going to be a regular recurring thing, a separate trust checking account is a good thing (just be sure the bank doesn't connect the trust account to the corporate account and use one for overdraft protection of the other... been there, done that and it creates a nightmare to document the audit trail). Oh, and make sure the trust checking account is setup under the trust's TIN.

[GMK]

Below Ground - I was just throwing my one and half cents in.

I appreciate your comments here very much. I believe they were enlightening to all of us. They were to me.

(BTW, it's been good to see you on wheels again ... but I don't have an answer about the coverage testing. )

[Mike Preston]

When confronted with this circumstance, I always ask the question: what if the check written to the participant falls into a black hole? If, for any reason (and surely we don't need to list the variious ways this has happened to each of us over the years, do we?), the check is not CASHED within a very short period of time, and especially if it becomes stale dated and has to be re-issued more than 6 months later, how do you explain this to a neophyte auditor who is claiming a PT took place?

The trust checking account is just cheap insurance.

[Monica Barnard]

I'm having a related issue with a brokerage firm. 401k Plan has 2 trustees. In the past, I have prepared a LOI for 1 of the trustees to sign to authorized benefit checks be issued. Brokerage firm is now saying that since there are 2 trustees, they both must sign LOI. Why should both need to sign a benefit payment authorization? What language could I use to avoid this?

Many thanks

[WDIK]

Why should both need to sign a benefit payment authorization? What language could I use to avoid this?

There should be language in the trust agreement that indicates whether all trustees, a majority of trustees, or a single trustee may act with regard to plan assets.

[Monica Barnard]

The language in the doc is "If the Plan has more than one person acting as Trustee, the Trustees may allocate the Trustee responsibilities by mutual agreement and Trustee decisions will be made by a majority vote (unless otherwise agreed to by the Trustees)"

[WDIK]

So what documentation is there regarding the trustees' "mutual agreement"?

[Monica Barnard]

The document states that "If the Plan has more than one person acting as Trustee, the Trustees may allocate the Trustee responsibilities by mutual agreement and Trustee decisions will be made by a majority vote (unless otherwise agreed to be the Trustees)". This is in the EGTRRA doc, and the wording has not changed from the GUST doc.

[GMK]

... the Trustees may allocate the Trustee responsibilities by mutual agreement ...

I believe (and correct me if I'm wrong), that WDIK's comment relates not to the plan document, but to this "mutual agreement" that the Trustees reached with regard to allocating their responsibilities.

Is there any documentation of what they agreed to with regard to whose signature(s) are needed to authorize a distribution?