Employer will not correct plan defects

[shERPA]

Plan sponsor adopted plan in 2005. Did not report all employees to TPA, did not fully deposit all deferrals. Plan went top heavy in 2008, sponsor has not contributed TH minimums to date. TPA finally gets all the information, revises ADP tests, calculates VCP correction amounts, TH amounts, delinquent deferrals, with earnings, etc. Total tab to correct under VCP is about $100K. Sponsor refuses to make corrections and directs TPA to terminate the plan.

TPA chose to resign because:

1. it won't knowingly prepare an incorrect 5500, and without restoring plan assets, the 5500 cannot be zeroed out.

2. 1099-Rs and distribution paperwork that represents distributions to be eligible for rollover when the plan is known

to be out of compliance would be incorrect.

3 participants have a claim to benefits under the terms of the plan, TPA doesn't want to be associated with this.

Individual (who is an ERPA) who made the decision to resign is getting push back from various parties, but cannot see any way to help the client terminate the plan without some reasonable efforts made to correct known defects.

What, if anything, can a circular 230 practitioner do for this client to get the plan terminated?

[Jim Chad]

I think to do other than resign is helping a criminal hide criminal acts. I think the TPA has to resign and if Employee deferrals are missing from the Plan, the TPA has to report them to DOL. I say has to as in the "right thing to do".

"Do what is right no matter the cost."

[K2retire]

I agree with Jim. Hopefully presenting it in the context of aiding a criminal will help with those who object within the firm. If it doesn't one has to consider whether it is appropriate to continue working there. And that's scary in this economy!

[david rigby]

There may be another view. Perhaps the TPA can "gently" enlist the assistance of the sponsor's attorney and/or accountant. Some plan sponsors pay more attention to the message depending on who is speaking. The result might be better (for the participants) than just walking away. Of course, the TPA should insist on a mechanism that will get its fees paid as well.

[ESOP Guy]

Curious....

Why does the TPA have to report his client to the DOL?

[Kevin C]

It sounds like you have notified them of their plan issues. Section 10.21 of Circular 230 also says you need to notify them of the consequences of noncompliance. If you haven't done that yet, you should. You might also want to contact the IRS Office of Professional Responsibility for advice.

I don't know of any way you can get this plan terminated without the sponsor's cooperation. If the problem is that they can't afford to make the correction, they might be able to offset the owner's account to make the participants whole. If you search the DOL website for an April 7, 2010 news release regarding First State Development, you will see that method used.

I recently helped with a case where the plan sponsor withdrew almost all of the plan assets. A participant complained to the DOL, so they got an audit. After the first DOL contact, their attorney sent them to us. They were able to repay the entire amount with interest and the DOL closed the investigation. We could have offset the owner's benefit, but that would have required a formal negotiation.