Prohibited Transactions

[Guest Pippy]

A large 401k plan pays one group of employees weekly and another group is paid semi-monthly. They only submit 401k deferrals and loan payments on a monthly basis, however. The TPA involved said the plan was fine to do this since the employer says they're segregating the participant assets from the general assets of the employer. Their auditors have not asked them to make up earnings on the late contributions.

Since the employer is stil holding the assets, it is my understanding that this would constitute a prohibited transaction because the assets are not invested in the participant accounts within the plan. Who is correct? Me or the TPA?

[MoJo]

A large 401k plan pays one group of employees weekly and another group is paid semi-monthly. They only submit 401k deferrals and loan payments on a monthly basis, however. The TPA involved said the plan was fine to do this since the employer says they're segregating the participant assets from the general assets of the employer. Their auditors have not asked them to make up earnings on the late contributions.

Since the employer is stil holding the assets, it is my understanding that this would constitute a prohibited transaction because the assets are not invested in the participant accounts within the plan. Who is correct? Me or the TPA?

This may be splitting hairs (but I excel at that), but in what capacity does the employer hold the assets once they have been "segregated" and to what extent are the assets segregated? I know of no requirement that the employer-as-fiduciary cannot hold plana ssets, provided there is a clear delineation between those assets and other corporate assets. In some situations where a conversion is taking place and the former won't and the new can't accept current contributions, we recommend that a separate account be established at a bank titled "XYZ Plan, by XYZ, Inc. as fiduciary" so that assets could be "segregated" and tracked, and clearly denominated as plan assets.

There is of course, a prudence issue with respect to how long the assets are held non-ivested, and to the extent in your situation it appears to be standard operating practice, I would questions it from a prudence perspective.

[Kevin C]

The due date for large plan deferral deposits is a subjective determination. If they have a well staffed payroll department and everyone on a given pay schedule is on the same payroll, I would expect the deposits to be made fairly quickly. But, if for example, they have one person handling separate payrolls for 20 or 30 separate locations split between the two pay schedules, they may be able to justify taking more time to deposit. If the DOL comes calling, the investigator will determine what he/she thinks the deadline is. We've seen a substantial variation in the standard used from investigator to investigator. But, in our experience, the odds of getting one to agree to monthly deposits in the situation you describe are pretty slim.

A PT occurs if the deferral funds are not deposited timely. If the deposit is mailed, the deposit date is the date the check was mailed provided the check clears the bank. The mailbox rule is from a footnote to the preamble of the final deposit regulations. Getting the deposits invested timely is a separate issue.

[Guest Pippy]

Thanks, Mojo. Unfortunately, my gut feeling is that their idea of segregating the assets is moving the money from savings to checking, so to speak, not moving them into a separate trust. I'll seek clarification from them.

[MoJo]

A PT occurs if the deferral funds are not deposited timely. If the deposit is mailed, the deposit date is the date the check was mailed provided the check clears the bank. The mailbox rule is from a footnote to the preamble of the final deposit regulations. Getting the deposits invested timely is a separate issue.

I think the PT occurs if the deferral funds are not segregated timely. Depositing them (and investing) is a fiduciary issue, not a prohibited transaction issue.

[jpod]

Not sure about your last comment MoJo. I think the concept is they become "plan assets" as soon as they reasonably can be segregated, and when they become plan assets they must be held in trust. That is not to say that it would be insufficient to place them in a special "parking trust" until it is convenient to send to the recordkeeper, but it still must be a trust (e.g., protected from the employer's creditors).

On the other hand, maybe that's what you're saying and my reading comprehension is a bit off.

[ESOP Guy]

The important issue here is how they are segregated. It has to be in some kind of account in which the legal title is the trust and not the employer. One of the concerns these rules are trying to address is if the plan sponsor went bankrupt today could the sponsor's creditors get to the money. If the account the money is in is titled in the sponsor's name then the answer would be "yes". If the account the money is in is titled in the trust's name the answer would be "no", the money is no longer an asset of the sponsor.

[MoJo]

Not sure about your last comment MoJo. I think the concept is they become "plan assets" as soon as they reasonably can be segregated, and when they become plan assets they must be held in trust. That is not to say that it would be insufficient to place them in a special "parking trust" until it is convenient to send to the recordkeeper, but it still must be a trust (e.g., protected from the employer's creditors).

On the other hand, maybe that's what you're saying and my reading comprehension is a bit off.

Beyond the control of the plan sponsor as "settlor" is what is required. The assets may still be within the control of the plan sponsor as fiduciary, requiring that the assets, as ESOPGuy points out may be in a n account titled in the name of the trust.

Keep in mind, there is no "one place" necessarily for a trust. There can be multiple accounts in multiple locations and still there is but one "trust." We have many plans that have many brokerage accounts at many wirehouses (some averaging 4 accounts per participant) and it is still all considered one trust. A checking account in the name of the trust controlled by the plan sponsor (as fiduciary) is sufficient to avoid the prohibited transaction. Keeping the money "uninvested" for very long is the fiduciary issue.

[jpod]

MoJo, I think we are saying the same thing: Once the contributions become plan assets they must be held in trust for the benefit of the plan. Once they are in trust a delay in investing them raises 404 issues, but not PT issues.

[MoJo]

MoJo, I think we are saying the same thing: Once the contributions become plan assets they must be held in trust for the benefit of the plan. Once they are in trust a delay in investing them raises 404 issues, but not PT issues.

Yes, and no, with respect for the first part. Once contributions become plan assets, they must be "segregated" from corporate assets to avoid the PT. The easiest way to do that is to place them in trust, but - and my example of having a multiple-site trust may have been misleading - it isn't the only way, certainly, to do so. Of course, while you may avoid the PT concerns, the way in which you "segregate" the assets may give rise to other fiduciary concerns. i.e. You could place the contriibutions in escrow with your accountant/lawyer/broker/neighbor/etc. You avoid the PT, but you have fiduciary issues in handing plan assets over to one who by virtue of the control of plan assets has become a fiduciary, without necessarily being capable of fulfilling their responsibilities as such. A poor delegation, coupled by oversight, etc...

I know that is splitting hairs, without a doubt, and 99.999999% of the time, assets either go into the "main" trust, or into a "separate" trust account of some kind (and that would virtually always be my recommendation), but the regs provide for the "separation" and not "deposit."

So, that is a long winded (especially for a Friday afternoon) way of say, yep, I (practically) agree - but I gave a presentation to a bunch of lawyers for CLE credit this morning (I'm a (recovering) lawyer myself) on Prudent Fiduciary Practices in a Litigious Society, and I'm feeling feisty, argumentative, and am paying particular attention to detail (especially since some of those lawyers represent some of our (TPA) clients. Hanging with a bunch of lawyers will do that to you....

Have a good weekend.

[Guest Pippy]

Thank you all for the discussion. It was very helpful.