Loan to Participant with Zero Balance

[John Feldt ERPA CPC QPA]

An investment provider received a rollover check and allocated it to the wrong plan and thus to the wrong participant.

The lucky individual had no plan balance otherwise. After the rollover was allocated to their plan account, they took out a loan. Some repayments have been made on that loan.

1. The person whose money was actually rolled in to the plan needs to be made whole, probably by the investment provider? I assuming the paperwork was in order but just not properly handled on their end.

2. The person who got the funds, via the loan, needs to pay back the loaned amount to the investment provider, not to their plan account?

3. The investment provider needs to empty out the account from the wrong person so it can be used for the correct person's account?

Or is this an excess loan that is taxable and still needs to be repaid - but how can it be repaid as a "loan" when there was no balance to actually loan out anyway?

Other ideas?

[david rigby]

At least one court believes that a participant who is incorrectly enriched thru faulty plan administration will automatically become a fiduciary.

http://www.plansponsor.com/Court-Finds-Former-Participant-Is-a-Plan-Fiduciary/

Perhaps the PA could find some "leverage" to "encourage" this participant to get this "loan" repaid ASAP. Maybe it's not really a loan.

[My 2 cents]

At least one court believes that a participant who is incorrectly enriched thru faulty plan administration will automatically become a fiduciary.

http://www.plansponsor.com/Court-Finds-Former-Participant-Is-a-Plan-Fiduciary/

Perhaps the PA could find some "leverage" to "encourage" this participant to get this "loan" repaid ASAP. Maybe it's not really a loan.

Assuming that the receiving participant is not actually comatose, for them to take note of money in their account that they know is not theirs and then to use it sounds like fraud or theft to me.

If you go to an ATM to take out $20 and the machine gives you $2,000 (that you don't have in your account), wouldn't the bank have a way to get you to give it back or else?

I personally thought that court decision was totally wrong, but in this case, a suitable exception might be made.

[hr for me]

I would expect the investment company to use their E&O insurance coverage to make the rollover participant whole immediately including some earnings rate of return unless they can prove fault with the sponsor or participant.

Then the investment company can decide how to proceed with the other plan sponsor (unless it is two different plans from the same plan sponsor?) on how to get the $s back from taking away any current balance and then trying to recover the rest of the loan money. Obviously it isn't more than $15k if the balance eat the time of the loan was $30k. Possibly investment company would pay back the E&O claim over time?