Client Payroll Issue

[mming]

A TPA who is not responsible for providing payroll services sets up a 401k plan and instructs the employer more than once in writing that deferrals are taken from/come from participants' paychecks and are tax deductible.  The employer, being a thrifty sort, does her payroll herself on Quickbooks and does not indicate such to the TPA. 

A few years down the line, after making deferrals most years, she figures out that they were incorrectly contributed from her corporate account rather than from her paychecks and her accountant never deducted them on the business returns.  She also paid federal and state income taxes on her unreduced W-2s.  Now she is blaming the TPA for just assuming that she was using a professional payroll service and not specifically instructing her how to process the deferrals on Quickbooks.  The accountant, who probably put her up to this since he must now charge her to make it right, is also taking the same stance.  The TPA believes the accusations are inappropriate for various reasons, including the belief that it's on her since she decided to do her own payroll without realizing all that's involved.  I am curious as to what TPAs think about all of this and what details they usually provide on this matter during the installation process.  Thanks in advance for any assistance.     

[Bird]

Shrug.  We like to think that we've seen nearly everything and take nearly every precaution to make sure that people don't screw up despite their best efforts, but sh*t still happens.  I have indeed prevented some clients from doing stupid stuff like this through hyper-vigilance and experience (sixth sense), but at the same time still have people messing up.  It's not your fault.

[pmacduff]

I agree with Bird.  Would also wonder, though,  what does the TPA service agreement with the client say, if anything, with regard to responsibilities?  

[Below Ground]

I suggest that what is stated in the service agreement between this firm and the TPA is critical.  Hopefully this is not a situation where a service agreement isn't even used.  (That thought makes me cringe.)  In our agreement we say exactly what we do and what it costs.  We also stated that prior errors, issues not specifically related to our service, and/or issues arising from acting in a manner that ignored or was contrary to written advisement we provided, is not our liability.   Given the big fat target placed upon the back of the TPA, I just think that as much as possible the terms of service must be clearly defined.  Then, the claim that the TPA is somehow responsible for the payroll processing, when that is clearly an issue not under the TPA's purview, is totally baseless.   So check out the agreement in effect, and modify future agreements as needed given this new experience.  My 2 cents.

[Pam Shoup]

Is the TPA a fiduciary to the plan in any way?  Does their service agreement basically say that the TPA performs ministerial functions and acts only on information provided by the employer?  If this is the case,  then the TPA has no liability.  However, in the future, the TPA want want to change their practices to request actual copies of W-2 forms or payroll reports directly from the [outside] payroll company and not accept reports run internally from the employer for annual wage and deferral reporting.  A W-2 is a quick way to tell if the deductions were made pre-tax, etc.

 

[imchipbrown]

Is this a one- or more-than-one participant plan?

[hr for me]

processed payroll on Quickbooks for more than 12 years...this is a payroll/tax issue, not a TPA/recordkeeper issue.

From my recordkeeping/plan testing and auditing days....The only place I see that the TPA could have caught this is in annual census data - but I have found at least my current TPA doesn't want to see all the difference pieces of compensation to check accurate plan comp, bat they ask us to calculate plan comp.  Back in the day, we audited plan comp/gross/w-2/pre-tax deductions and any excludable comp in our annual testing process.

And I suspect even with the big name payroll providers that plan comp is more often wrong than one might assume....but is a big area of liability. 

That said, this lady created her own mistake if she didn't realize that pre-tax deferrals meant that she didn't pay taxes on them! She shouldn't be processing payroll or working on the 401k information!

[mming]

The plan covers more than one participant, i.e,. both HCEs and NHCEs. 

Our initial reaction was that the TPA is OK in this case, but it seems we started to overthink things.  Thanks everybody for all of your input. 

There is a signed service agreement that spells out that the TPA is not  a fiduciary, data received will not be audited, and that there's no obligation re prior errors.  I agree that lengthening the agreement to add every detail of the services provided and not provided would be prudent.  The days of fitting such an agreement on one or two pages are long behind us, aren't they?   

[RatherBeGolfing]

On 6/27/2019 at 4:38 PM, mming said:

The plan covers more than one participant, i.e,. both HCEs and NHCEs. 

Our initial reaction was that the TPA is OK in this case, but it seems we started to overthink things.  Thanks everybody for all of your input. 

There is a signed service agreement that spells out that the TPA is not  a fiduciary, data received will not be audited, and that there's no obligation re prior errors.  I agree that lengthening the agreement to add every detail of the services provided and not provided would be prudent.  The days of fitting such an agreement on one or two pages are long behind us, aren't they?   

Mine is about 8-9 at this point, but it includes fee disclosures and schedule of services and fees in addition to services/responsibilities.  It states what services we perform and what the client's responsibilities are.  

That said, even with a very basic 1 page agreement, it would be a stretch to conclude that a TPA is responsible for payroll issues.  I'm pretty sure the accountant was part of the screw up and is trying to avoid the consequences.