Disability Payments into a 401(k) Plan

[AJ North]

We have a situation where a participant is covered under a disability plan sponsored by the employer that has a rider that provides for contributions to be made on the participant's behalf to cover lost 401(k) and employer matching contributions, should the participant ever become disabled. Well, now we have a participant who has retired via disability and has taken a distribution of their entire account. The vendor of the disability policy is now sending the employer checks to "cover" lost 401(k) contributions. My understanding of these arrangements is that the contributions are deposited in to a trust for the participant to tap into once they reach age 65.

I understand that there are vendors that provide these kinds of disability 401(k) plan continuations as an actual investment under the plan and I would guess that the plan would have to have language to cover this kind of arrangement The plan does not have any language that covers this and we are at a loss on how we can provide this plan sponsor with some assitance on how to handle these payments. They have tried to set up a tax-deferred trust at several area banks and no one would accomodate there requests.

Any insight on how this situation can be handled and other info would be greatly appreciated.