record keeper issue

[K2retire]

We are the TPA on a 401(k) plan at Mass Mutual. In 2012 a participant who is still employed by the plan sponsor received a "termination" distribution due to erroneous information provided to Mass Mutual. The employee has repaid the distribution in 2013.

Mass Mutual is saying that the employer must make up the difference between the amount the participant repaid (exactly what she received) and the current value of the shares that were sold to make the distribution originally. They also plan to issue an amended 2012 1099-R to make it appear that the distribution never happened.

Any suggestions how to persuade Mass Mutual that their approach is wrong?

[BG5150]

EPCRS Sec. 6.06 (4)

(4) Correction of Overpayment (defined contribution plans and 403(b) Plans). (a) In general. An Overpayment from a defined contribution plan or 403(b) Plan is corrected in accordance with the Return of Overpayment method set forth in this paragraph. Under this method, the employer takes reasonable steps to have the Overpayment, adjusted for Earnings at the plan’s earnings rate from the date of the distribution to the date of the repayment, returned by the participant or beneficiary to the plan.

(b) Make-whole contribution. To the extent the amount of an Overpayment adjusted for Earnings at the plan’s earnings rate is not repaid to the plan, the employer or another person must contribute the difference to the plan. The preceding sentence does not apply when the failure arose solely because a payment was made from the plan to a participant or beneficiary in the absence of a distributable event (but was otherwise determined in accordance with the terms of the plan (e.g. an impermissible in-service distribution)).

Bolded seems relevant.

[K2retire]

Thank you!

[K2retire]

Mass Mutual's compliance department is now saying that since this was an "impermissible distribution" and the quoted section above refers to "overpayments" it does not apply -- despite the clear reference in the highlighted sentence. Aside from the fact that I believe they are wrong, they are not supposed to be the fiduciary on the plan. Has anyone had any luck persuading them or other record keepers to follow direction from the plan's named fiduciaries when the record keeper's position is wrong?

[BG5150]

So, it looks like it's just the earnings that are due back in the account and that EPCRS says it's not up to the ER to fund it.

Now, MM is saying the ER must fund it.

What is MM gonna do if they don't pay it?

(Can you get a copy of the MM service agreement? Maybe there is something in there.)

[QDROphile]

Mass Mutual may be thanked for its opinion about how to correct errors, but the employer and plan administrator have to decide. Where they look for advice is up to them.

[K2retire]

Mass has already credited the full amount to the participant's account and is billing the employer for ~$1,700 to make up the difference. The service agreement is a good idea. I'll see if the client can locate it.

[BG5150]

Might be helpful to remind MM they aren't the only game in town.

There's always The Hartford!

(/sarcasm)

[QDROphile]

"Billing the employer" cannot be the correct terminology or procedure, even it the employer has decided that the correction will involve additional corrective contributions.

[K2retire]

I haven't heard anything from the plan sponsor, so apparently the bill they prepared and mailed to me is the only one that has gone out so far. The invoice says "Your account will be debited." But I can't tell whose account -- it almost looks like they're trying to deduct it from the revenue sharing they pay us.

[Atila]

Did Mass Mutual end up issuing a corrected 1099-R for 2012? Do you know if this was the proper treatment?

Do you know if the participant rolled the distribution into an IRA? How was the reporting corrected with respect to the IRA?

[K2retire]

Mass Mutual debited the employer's bank account for the earnings. The distribution was initially rolled to an IRA. A 2012 1099-R was issued showing the rollover. We don't know yet what the IRA will report for 2013.

We were eventually able to persuade them to accept direction from the plan fiduciaries and restore the dollars to the account rather than reversing the original transaction to make it appear that it had never happened.

[Kevin C]

I wonder if showing them the definition of "overpayment" from the rev.proc. would have helped to convince them that BG had the right cite?

5.02(3)©Overpayment. The term “Overpayment” means a Qualification Failure due to a payment being made to a participant or beneficiary that exceeds the amount payable to the participant or beneficiary under the terms of the plan or that exceeds a limitation provided in the Code or regulations. Overpayments include both payments from a defined benefit plan and payments from a defined contribution plan (either not made from the participant's or beneficiary's account under the plan or not permitted to be paid under the Code, the regulations, or the terms of the plan). However, an Overpayment does not include a payment that is made pursuant to a correction method provided under this revenue procedure for a different Qualification Failure. Overpayments must be corrected in accordance with section 6.06(3).