Misplaced contributions

[Guest jreddi]

After doling out my share of answers, I have a question.

Back in May 99, we had a bonus pay run that was misread by our payroll company as an adjustment run. 401(k) contributions were deducted, but never reported to the investment company so no one had this money invested. This problem surfaced this past month.

First, how much trouble are we in?

Second, would it be in our best interest to figure the earnings since May 99 and credit this to each account? This may mean that some are over the annual max.

Third, what about the terminated people? Some still have money in their accounts.

[Guest]

no idea, but I will shoot at your second point.

my understanding is that 'earnings make up' do not count toward annual addition - so no one should be over the max. they are deductible by the employer, I don't think they count toward the 15% limit either.

[Alf]

It sounds like the contributions were withheld from the participants pay, but never remitted to the plan. Is this the point?

You are going to have to pay up to the DOL including interest and the penalty.

I have always thought that the "annual addition" tag was pretty hard to avoid (the only way to avoid it is by making restorative contributions to settle fiduciary breach claims - which might just fit the bill here).

You are also going to have to track down the ex employee and contribute the missing funds to their accounts.

[Guest PeterGulia]

While I offer no suggestions about whether it's desireable to use the Department of Labor's Voluntary Fiduciary Correction Program, that document [Federal Register volume 65 number 51 pages 14163-14179 (March 15, 2000)]includes a formula for what the DoL appears to consider reasonable restoration.

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[Alf]

I don't see how the failure to remit contributions is a PT. It clearly is a fiduciary breach and a qualification defect because the plan terms were not followed. I would be interested in hearing the logic regarding a PT.

I also agree about 415. The correction will (probably - see above post) be an annual addition, but not for the year of correction. The 415 test for the year of the failure will have to be re-run.

[IRC401]

If your advisor is "old school" , he will tell you that the plan administrator made a mistake and now needs to make everyone whole as quickly as possible, including terminated employees and including calculating gain, which could be more than you think if someone was in a NASDAQ fund last year. [NOTE: I'm assuming that the amount was small relative to the total 401(k) contributions for the year.]

If your advisor is "new school", he will tell you that you have a prohibited transaction ( and need to make everyone whole as quickly as possible).

Be careful before you ask an attorney for a written opinion. I don't think that correcting the problem will create a 415 problem. Your correction needs to take into account 402(g) or 415 problems that would have arisen had the mistake not been made.

[Kirk Maldonado]

The employer failing to timely remit the participant contributions to the plan is a prohibited transaction because the employer is using the plan assets for its own benefit (e.g., earning interest on those amounts).

That's one of the reasons why the DOL shortened the period in which the contributions must be forwarded to the plan.