Payment of Benefits from Wrong Plan

[Guest mcw]

Employer has two DB plans. In 2009, several participants who should have been paid out of plan 1 were paid out of plan 2. Participants received the correct amount but from the wrong plan. I think one correction method would be to get a refund of the overpayment from plan 2 and make the payments out of plan 1. However, the particpants do not have the available cash to refund the money. I know they will be getting a check from plan 1 in the same amount but that doesn't guaranty that the check back to plan 2 will clear. Also, the plan will then have 1099 issues for the payment. Do you think the plans can avoid this hassel and just have plan 2 transfer the money to plan 1? Everyone is in the same position.

Another alternative would be for the employer to contribute the money to plan 2 and move on.

What are your thoughts?

[Guest Sieve]

Transfer from one plan to the other ought to be OK. I've seen this situation before.

Another possibility would be to cut checks from the proper plan to the participants, and have then come in & endorse the cheks over to the other plan.

It may not be necessary to change the 1099 if the reported EIN (payor) is the same.

[Guest SBosworth]

We have a client facing a situation like the one described in this thread. There are two plans and many participants who have participated in both plans. Administratively, participants received their combined benefit from the plan under which they were eligible employees as of their last termination dates. The client's outside counsel determined that prohibited transactions have occurred with respect to each affected participant. I have been asked to complete Form 5330. Looking at Revenue Procedure 2008-50, IRC 4975(e)(2), the instructions to Form 5330, and Form 5500, schedules G and H, I don’t think that these errors should be treated as prohibited transactions. If prohibited transactions occured, the employees would be subject to the excise tax. That result does not seem right.

My preference for correction would be to have the employer contribute the aggregate differential payment, plus interest, to the plan that paid too much. Proper income tax reporting (Form 1099-R) with respect to each plan would be required. I'm less comfortable with the other alternatives. I'm afraid that the situation might get worse if a participant receives a check and cashes it rather than endorsing it over to the other plan. On the other hand, a plan-to-plan-transfer by the plan that paid too little would have to be reflected on its Form 5500 (Schedule H, 5b) for the year of the correction. I'm concerned that such an asset transfer would also require advance reporting on Form 5310-A.

I would be grateful for anyone else’s thoughts.