Late contributions paid into new plan

[Guest djkirby]

I have a Plan Sponsor that set-up a new 401(k) plan (Plan B), effective November 1, 2009, and ceased participation in the old 401(k) plan (Plan A) October 31, 2009. After a DOL review, it was determined they did not properly remit approximately $40k of prevailng wage amounts to Plan A. The sponsor's intent is to merge the plans; however, this hasn't happened yet. The $40k was remitted to Plan B in 2010.

Additionally, there were late deposits on elective deferrals and the 5330 has not been filed. The sponsor intends to deposit the lost earnings from Plan A into Plan B as well.

I have received confflicting information on whether this is proper/allowed. Any insight would be appreciated.

[ETA Consulting LLC]

Anytime there is something that happened that shouldn't have, or something that didn't happen that should have, when there is no specific IRS or DOL guidance in dealing with the situation, you will likely receive conflicting advice. That's not necessarily a bad this; it's merely the nature of our industry.

One thing is clear from your fact pattern is that the employer clearly honored its commitment to fund the contribution, but merely funded it to the incorrect plan. By strict interpretation of the plan language, the contribution must still be made to the Plan A. What you could do is a straight accounting of what would've been funded to Plan A had it been correctly funded and compare this amount to what was actually funded in Plan B. This would structure the problem. You would then face debate as to whether this is correctable under SCP, or whether VCP and VFCP program is necessary for the fix. You would make a decision of how best to proceed; looking at the viability of each alternative.

For instance, a VCP filing outlining this and merging the plans would argubly place the plan in the exact same condition it would've been had everything happened correctly. VFCP may not be necessary, as the participants would be technically whole with respect to there entitlements under the plans.

Good Luck!