Found Money after Termination

[Briandfox]

A 401(k) Profit Sharing Plan was terminated and paid out over 2-years ago.

The Trustees just received information from the former custodian that they would receive a payment as part of some class action settlement because the Plan was charged "too much."

Questions:

1. How should this money be accounted for? We are thinking it should be paid out to the participants pro-rata (to the extent the charges affected each participant's account balance).

2. A final 5500 filing was already done over 2 years ago. Do we simply do another final 5500 filing in the year of asset recovery?

3. One consideration here is to try to minimize audit risk, will the filing of a final 5500 filing 2 plus years subsequant to the execution of a plan termination amendment and resolution trigger it for audit, or make this an "ongoing plan."

Thanks

[rcline46]

Refuse the check. It will probably cost more than the check to do the work.

[hr for me]

Unless it is a very large amount and worth doing a lot of work and a 2nd set of distributions, I totally agree with rcline46. Sometimes you just refuse it.

[Peter Gulia]

Field Assistance Bulletin 2006-01 (April 19, 2006) includes this:

"[C]ompliance with ERISA’s fiduciary rules generally will require that a fiduciary accept a distribution of settlement proceeds. The Department recognizes, however, that in rare instances the cost attendant to the receipt and distribution of such proceeds may exceed the value of such proceeds to the plan's participants. In such instances, and provided that there is no other permissible use for such proceeds by the plan ([for example], payment of plan administrative expenses), it might be appropriate for a plan fiduciary to not accept the settlement distribution."

Query: If it could be legitimate to refuse the settlement money, might it also be legitimate to accept the money and use it for some other employee-benefits purpose?

[Briandfox]

Thanks Fiduciary Guidance Counsel.

So basically if the costs of administering the settlement exceeds the value, we don't have to do it because the net effect is the sum total of the expenses, and then some, will run negative.

[Peter Gulia]

If it could be legitimate to refuse the settlement money, might it also be legitimate to accept the money and use it for some other employee-benefits purpose?

[Briandfox]

I don't think so, because technically that money is owed to the participants if the settlement encompasses excess fees that were charged to participant accounts.

However, if the distributions to each participant would result in a $0 after accounting for distribution fees, custodial fees, etc... Then it would make sense to refuse the settlement fee.

That, and in this situation if the employer accepted the money (as opposed to the plan), I think it would be taxable as a reversion to the employer (excise tax, etc.)

[david rigby]

If it could be legitimate to refuse the settlement money, might it also be legitimate to accept the money and use it for some other employee-benefits purpose?

Reasonable query. Peter, can you suggest an example where this would be legitimate? What "other EE-benefit purpose" would be acceptable? Are there parameters where the test of legitimacy would clearly fail?

(I'm not asking for free legal advice, just looking for some generalities that can be a discussion basis.)

[ESOP Guy]

Back to the original question.

I can not cite anything for this answer but here is what I would do in most cases.

I would compute the amount the people would receive as you state pro rata based on the final balance payments. If it is cost effective to issue forms and so forth do so and make the payments.

I simply wouldn't file a new Form 5500. The 5500 rules just don't seem to contemplate this kind of fact set. I think the risk of the lack of a form 5500 coming back to bit the plan administrator is small enough to risk.

Obviously, it is a risk and each has to decide what risk they are willing to take but I have helped clients do what I described above before as a TPA.