Safe harbor employer 3% match never applied by pension plan sponsor to three terminated employees.

[carolb23]

On 3/15/2010, we did our safe harbor match of 3% across the board to every eligible employee who worked and met our requirements in 2009 even if they left during the year. There were three terminated employees which the pension plan never deposited in their accounts because they had withdrawn their funds but they never notified us of this issue.

In 2014, when I was doing our bank reconciliation, I noticed one of the 401K funds withheld from a payroll was never deducted from our bank. When I contacted the pension plan and questioned if the funds were deposited into the employees' accounts they said yes and my boss verified everyone had their funds in their account for that payroll. After many months of emails and calls to verify this, we assumed the bank had made an error in our account and not the pension fund.

In 2015, once again when we were doing the bank reconciliation, it was noted that the pension fund took out less then what was withheld from the employees' paychecks.l

After many phone calls and emails, we were finally able to determine that the pension plan used the funds from the three former employees in 2010 which was sitting in a cash account to cover the two payrolls described above. All of this was done without our knowledge. We were not aware they had a cash balance with funds we submitted.

In speaking with our accountant, they have agreed with us that we have to give the three former employees the funds they were entitled to in 2010. My question is how do we do this correctly? We don't know a way to have the monies go through our payroll as this was done in 2010 already. And the pension plan can only take funds from payroll. If we send checks to the former employees, is the whole amount taxable to them? Is there a way to get them the funds so it's not taxable until withdrawn?

[401king]

I don't have your answer - But why is it that your provider cannot correct this for you if it is, in fact, their mistake?

[Bird]

I'd ask the same Q as 401king, although I can hazard a guess at the answer - your "service provider" (using the term loosely) is probably a large payroll company or other impersonal outfit. Your commentary "After many phone calls and emails...All of this was done without our knowledge. We were not aware they had a cash balance with funds we submitted." is telling. And you figure that trying to get them to actually do anything is about as helpful as poking yourself in the eye with a sharp stick, right?

Ultimately, you need to work with them to fix it - it is really on them, although no doubt there was a message waiting on the website for you to read so they will blame you.

Ultimately, the answer to your questions is that you need to open or re-open accounts for them and deposit the money to those accounts. It raises questions about timely deposits but that's a different matter.

[hr for me]

Maybe I am weird and a bit off topic -->> I also would put into place a much more timely reconciliation (because it sounds like you are waiting until end of year to do a single reconciliation...forgive me if I am misreading that)-- that is checking each month or so to make sure the deposit to the recordkeeper/administrator matched what came out of your bank account. We are a pretty small company and our controller reconciles each month for all transactions.

When you found the "bank error" in 2014, did you ever contact the bank about it? Not a great assumption at that point to not get to the bottom of it and just blame it on an unknown error.

Does the provider not give at least annual reports that would have shown this unallocated cash from 2010 to sometime in 2015? While I do agree this is a provider error, I think that it could have been caught much sooner if someone internally had been auditing/reconciling in a more timely manner. You obviously know now that a 401k/payroll setup is not an automatic and forget about it kind of benefit. Someone internally at your company should be responsible for the ongoing admin of the plan, even if the provider claims they do 100% of the work. In the end the employer is 100% responsible for everything that happens in the plan.

[rocknrolls2]

If the pension fund was using the deferrals from 2010 to cover certain past payrolls, then the trustee(s) or whoever is running the financial end of the fund is committing a fiduciary breach. Either the pension fund, the trustee or whoever directed the money to be applied in the manner in which it was applied have to make up for the error. They would need to deposit the funds with earnings to the affected employees' accounts (even if there is not currently any for one or more employees). I am assuming that "we" is the employer. There is a risk that the delayed discovery of this by the employer could result in co-fiduciary liability to the employees because the employer has effectively enabled the person(s) in question to commit the fiduciary breach. You should investigate to see if the Labor Department's Voluntary Fiduciary Correction program is available to correct this error and how it coordinates with EPCRS on the IRS side.

As to how to approach this, contact the persons involved and tell them that they have committed a fiduciary breach and have to rectify it. If they don't, the employer is in a difficult position because if it sues the persons in question, they will likely defend by citing the co-fiduciary liability provisions of ERISA. If you report it to the DOL, there is also a risk that they could look to require the employer to pony up a part of the liability, particularly if the persons in question have limited assets or are otherwise insolvent. Obviously, if the missed amounts and earnings do not add up to a lot of money, then you can posture this more aggressively. The worst possible scenario is if the employees in question sue and they have wind of what has happened. Good luck.

[ESOP Guy]

I agree with all of the above. Since I didn't see it mentioned above but the correction to the 3 people will have to include some kind of lost earnings in addition to the contribution. Once again someone at your service provider ought to be telling you this.

However, as you can tell from the earliest comments you have a bigger problem then the 3 people. There is a systematic problem that allowed this to happen and not go detected for years. That systematic problem could cause larger issues with the IRS or DOL.