Class Action Proceeds, Terminated Plan

[Guest BWNWE]

My employer filed for bankruptcy in 2005 and in the process sold off two business units in attemp to return focus to the company's core competencies. Anyhow, these business units each maintained their own 401(k) plans and, upon bankruptcy, my employer terminated their respective plans.

We were recently notified by the record keeper--both company's employed the same rk--that they filed for and received a share of class action settlement proceeds on behalf of both plans. Because these plans are terminated (which may or may not change anything in terms of IRS rules regarding plan distributions), I would like to simply distribute the proceeds, pro-rata, to eligible participants in the plans. In the past, we've had a slew of issues distributing money to these participants because they obviously don't provide as updated addresses as they're not, and never were, in our personnel database.

It's my preference to distribute the money, withholding 20% of any distribution in excess of $200, and simply inform the participants that they may roll over the distribution within 60 days and, if they had 20% withheld, make up the 20% or have that portion considered a taxable distribution. Can I do this or do I have to provide the participants the opportunity to elect to have their distribution rolled over?

Thanks

[Bird]

Can I do this or do I have to provide the participants the opportunity to elect to have their distribution rolled over?

I think you "have to" but...the more you treat them as plan assets, the more you have to think about questions like "mmm, should I amend the final tax return, and file returns for intervening years (late)...oh, and should the plan be restated for EGTRRA (late)...?"

I don't think any reasonable agent would expect all that. So maybe the plan nature of this found money should be ignored completely and it should just be spread around, with no withholding? I don't know, but this is a real headache for terminated plans.

[Guest BWNWE]

Can I do this or do I have to provide the participants the opportunity to elect to have their distribution rolled over?

I think you "have to" but...the more you treat them as plan assets, the more you have to think about questions like "mmm, should I amend the final tax return, and file returns for intervening years (late)...oh, and should the plan be restated for EGTRRA (late)...?"

I don't think any reasonable agent would expect all that. So maybe the plan nature of this found money should be ignored completely and it should just be spread around, with no withholding? I don't know, but this is a real headache for terminated plans.

Thanks Bird. Unfortunatley--and this is going to sound ridiculous--we don't even have a 401(k) plan document for either company. Neither company's 401(k) plan was ever merged with the my company's plan as my company acted in more of "suzeraine role" in that they provided direction to the companies and reaped the profits (or more obviously sustained the operating losses) but otherwise allowed these companies to manage their own affairs.

I think to avoid a potential violation of ERISA/PPA 2006 we're just going to have to bite the bullet and provide participants whose distributions are subject to manadatory withholding an opportunity to roll over their share of the proceeds. I think that's the prudent way to handle this....do you agree with that?

[Bird]

You're trying to do the prudent thing, and I don't want to try to tell you to do the "wrong" thing, but you say you don't have a plan document, so is it really plan money? And there isn't really any consequence to not withholding; the participant would have to complain and then you would say "fine, give me back the money so I can withhold some." And, I don't see this being on a radar screen anywhere. Sorry to just hang it out there.

[BG5150]

How much money are people getting? In my experience, people were getting like 50 cents to a few dollars. $90 I think was the most I've allocated.

If it's under $200 you don't have to give the the opportunity to roll the money over, as there is no mandatory withholding.

[Guest BWNWE]

You're trying to do the prudent thing, and I don't want to try to tell you to do the "wrong" thing, but you say you don't have a plan document, so is it really plan money? And there isn't really any consequence to not withholding; the participant would have to complain and then you would say "fine, give me back the money so I can withhold some." And, I don't see this being on a radar screen anywhere. Sorry to just hang it out there.

It is Plan money because both companies were closed and their assets sold off. My employer made the decision to terminate the plans, as the parent company. Because the companies no longer exist, we have fiduciary responsibility, in my opinion. I was not here at the time the plans were terminated but my benefits group handled the termination, including providing communication that the plans were terminated and rolling over missing participants' distributions into IRAs.

Also, I spoke to a former higher up with a deferred db benefit the other day and he gave me some interesting, though not particularly useful, information on the acquistion of these two companies and sale of their assets. There wasn't much information that made it out alive. The records we have for plan participants were provided by the former record keeper and were dated from the time the companies were closed (as no more contributions were being made to participants accounts) which was 2003 (Plans terminated in 2005).

We received no records from either company and, as I said, the companies exercised complete control over their own affairs--including administration of their plans.

I spoke to our current record keeper this morning--and they were nice enough to get one of their attorneys on the phone despite the fact that these plans are not and never were under their company's watch. She was of the opinion that we would not be violating ERISA by simply distributing the funds to the participants in check form without providing the participants an opportunity to roll over the distributions. These settlement proceeds are, in essence, more like "found" money than distributions of participants balances.....though she did follow up by providing me a stack of reading materials.

I appreciate the help....there's just not much guidance out there regarding distributions of class action settlement proceeds to participants in terminated plans. I hate to jump the gun and use the allowed "reasonable person" methodology without making sure that I've exhausted and documented that we've attempted to locate participants and distributre the funds in accordance with ERISA. We long ago hit the point in which we realized that it was going to impossible, administratively, to locate and distribute funds to each participant.

I also toyed with the notion of simply rolling over the distributions to an IRA with our currend DB default IRA provider but some of these distributions are in the $10 range and that seems ridiculous. I'm not certain they'd even accept a $10 roll over.