Plan to Plan Transfer? or Possible Self-Correction?

[ERISA Biker]

Here is my fact pattern:

• Company A and Company B are in the same controlled group of companies.
• Company A and Company B each maintain separate 401k plans.
• A group of employees are transferred from Company B to Company A.
• Company B's 401k plan treats these employees as being terminated and allows them to take distributions and/or rollover their accounts.  Rollovers wind up going both to IRAs and Company A's 401k plan.

I believe this is a plan operational error.  Because the employees remained in the same controlled group, I don't believe there was a termination of employment that would have triggered a distribution event under Company B's 401k plan.  If I am correct, there are a few issues here.  One of which is Company A's 401k plan accepting a rollover that turns out not to be an eligible rollover distribution.

Is there any authority for asking the IRS, as part of a VCP application, to treat this as a plan-to-plan transfer for the affected employees?  Both Company A's and Company B's 401k plans would need to be retroactively amended to permit this transfer, but it strikes me as the "best" or "most reasonable" fix here.  Any helpful thoughts would be appreciated.

[QDROphile]

You can ask for whatever you want in a VCP application.  A proposed plan to plan transfer for all former B employees involved in the transfer as the "should have been" target for correction should be well received by the IRS.

[ERISA Biker]

Let me suggest another solution since both 401k plans are managed by the same TPA:

• Under Regulation 1.401(a)(31)-1, Q&A 14, Company A's 401k plan is required to return the improper rollover contribution to the participant, plus earnings.  Let's assume the rollover contribution was $10,000, and there are now $1,000 in earnings, for a total of $11,000.
• Under the EPCRS, Company B's 401k plan is required to attempt to recoup the overpayment (in this case, the improper rollover distribution of $10,000), adjusted for earnings (which may or may not be the same as the $1,000 in earnings noted in the prior bullet point).
• Since we have the same TPA involved, couldn't the $11,000 in the participant's account in Plan A simply be moved back into his or her former account under Plan B?  In that scenario, both plans have corrected the mistake as required by the IRS guidance.  And I would treat this as "self-correct-able" under the EPCRS.

Thoughts?  Anyone willing to poke serious holes in this proposed fix?

[K2retire]

Your real problem is with the funds transferred to IRAs.

[ERISA Biker]

I think the correction for any funds transferred to the IRA is straightforward under the EPCRS.  Attempt to get the money, plus earnings, back from the participants and notify them that, due to an error, the original distributions were incorrectly made and not eligible for tax favorable treatment -- i.e., rollovers or IRA contributions.