This looks ugly

[Santo Gold]

I got my first look at a 403(b) plan with around 90 participants. The plan has been in existence since 1998. It allows for 403(b) and non-elective/profit sharing contributions (match not allowed).

The asset report from the mutual fund company shows that the EE and ER money has been commingled. There is no separate accounting of how much of any given participant's account balance is EE and how much is ER.

The good news is that the PS contribution is 100% vested, so there should not be any distribution problems for terminees or retirees.

Regardless of the 100% vesting, the requirement is that the plan has to account for EE and ER contributions separately, even in 403(b) Plans, correct?

(1) Any suggestions on what the next steps should be? Do we need to go all the way back to 1998 and start the accounting process at that point?

(2) Is this something to resolve through VCP? What kind of penalties or fines do you think would be involved?

(3) If the records are not available back to 1998, do we just start with when the records are good and sort of grandfather the assets before that time as a EE/ER account, or something just to distinguish when the bad recordkeeping ended?

Thanks for any advice!

[ETA Consulting LLC]

You are correct. It is ugly. Interestingly enough, there are many contengencies on how ugly it is. The two sources of money each have their own regulatory restrictions on withdrawal availability (Profit Sharing being more lenient than the Employee Deferrals). These restrictions apply to the attributable earnings for the contributions, making it important to recordkeep and track separately.

Yes, you would need to go back to 1998 and Recordkeep to the current time, and revise the process to ensure this level of recordkeeping is done going forward.

VCP is likely, to the extent that it becomes impossible to recordkeep back to 1998. In such event, you are asking the IRS to agree with your most resonable approach giving the impossibility of providing a full correction.

At this point, there are more contengencies than concrete answers.

[Santo Gold]

FYI - In-Service Withdrawals are not permitted in the plan.

I'm not sure how I can effectively explain to the client what the real problem is here. No one got paid out incorrectly, no one has gained or lost any money as a result of the commingling. To explain that we will need to go back to 1998 and basically recreate each year's financial activity, at a cost of $$$ for no apparant purpose will not likely be understood. "Because the IRS says so" seems to be the only real reason here.

[K2retire]

"Because the IRS says so" seems to be the only real reason here.

Add something about what they can do if you don't do what they say to your explanation. Most people don't understand they nuances of retirement plan rules, but pretty much all of them understand that the IRS doesn't follow logic and has the power to hurt them.

[Bird]

Playing Devil's Advocate, I'm not so sure that you have to do anything or for that matter that any violations of ERISA and/or the IRC have occurred. I don't think you'll find a requirement that sources be accounted for separately, just that certain types of money are subject to restrictions on distributions. We all know that it's a lot better to track 'ee and 'er contributions separately for that and other reasons. But this plan doesn't allow in-service withdrawals, and if you put a note in the file to never, never, ever allow that on pre-2011 (or whenever you can start to track it) money, and identify that money and new money properly, then that might take care of it.

My 2 cents.