Reimburse of Investment Losses

[Guest Thornton]

We recently took over a plan that was transferring from an insurance to a brokerage/mutual fund investment product. Plan participants were informed that the assets were in a money market fund at the insurance company pending transfer. In fact, they were invested in the market. The transfer was to take place 7/1/98, but did not occur until 8/7/98 due to delay on the part of the insurance company. Asset value dropped significantly. Is there any authority for the plan sponsor to make up the investment losses? If the answer is yes, would the contribution be deductable?

[Alan Simpson]

According to IRS Letter Ruling 9831031 this may be possible. Under this letter the IRS ruled that a restorative payment made by the employer to ensure that participants recover the portion of their account balance lost as a result of the administrator's delay in allowing the participants to direct their investments: (1)was not "contributions" subject to deduction limitations or excise taxes on nondeductible amounts; (2) did not adversly affect plan qualification under the nondiscrimination rules or because of contribution limitations; (3) was not taxable to plan participants; and (4) was deductible by the employer.