Correcting late deferrals in a terminated plan

[Guest helix]

Hi all - Have a situation here. Organization A is going out of business and has terminated their 403b plan and distributed or rolled over plan assets. Org A no longer has custody of plan funds as they are fully distributed or rolled. A plan audit of subsequently determines there were at least two payroll periods where late remittances were made during the final plan year.

1) Is the organization still required to correct by paying lost earnings and interest as well as pay excise taxes related to these transactions even though the plan is terminated?

2) If so, how does the organization pay lost earnings and interest if it no longer has custody of the funds? Does it have to cut manual checks and mail them to ex-participants?

Thanks!

[PensionPro]

We have the same situation in a 401(k) plan. Any ideas?

[Belgarath]

Section 4 .07 of Revenue Procedure 2008-50 allows use of the VCP program even for terminated plans. However, this probably needs to be balanced against reality - how much interest are you talking about? If the amount to be allocated to a participant is 12 cents, are you really obligated to cut a check for that? You may be able to rely on Section 6 .02(5)(b). However, there is some hair-splitting here, as this relief does not apply to "corrective contributions."

I think in the real world a lot of these situations are determined by the amount of interest to be allocated. If it is small enough, it is likely to be ignored, and the "risk" to the employer is accepted. (My experience is that the client's CPA is much more inclined to advise the client to ignore than the TPA's generally are.) If it is significant, then it is corrected.

http://www.irs.gov/irb/2008-35_IRB/ar10.html#d0e951