Erroneous Deposit of Money Owed to Plan

[Christine Roberts]

A check representing a monthly payment on a note owned by a qualified plan is mis-deposited in the community property checking account of the individual whose professional corporation sponsors the plan, and his former spouse (who is an alternate payee under a QDRO). Is there any problem with simply disgorging the money and writing a new check to the plan from the community account? Would failure to disgorge (i.e., participant writes a separate check to the plan from another account) be a prohibited transaction?

[Dave Baker]

I suppose one could say that the funds are the plan's property and that the bank account is holding them in some sort of constructive trust ... but it seems to me that the plan's only asset is the note, and that the obligation to pay on the note is personal to the borrower such that there's nothing magic about the funds that are now in the wrong bank account. The borrower still owes the missed payment, and if the borrower writes a check out of some other account to satisfy that liability then the plan is getting its due. The plan really doesn't care where the money comes from, just that it gets the money as soon as possible. Sounds like the funds might be gunked up in the bank account for a while. Perhaps it even would be a fiduciary violation for the plan trustee to wait for those funds to get freed up again, if the borrower is willing to make payment from another account now!

[pjkoehler]

If the employee sent the trustee or other fiduciary a check as repayment of a loan, which was payable to the trustee, then the trustee or other fiduciary held that check for the benefit of the plan. It was obligated under ERISA to insure that the proceeds got into trust solution. That fiduciary clearly breached its duty in multiple ways and probably engaged in a self-dealing prohibited transaction as well. Under ERISA Sec. 409, the fiduciary is liable for the loss sustained by the plan caused by the misdirected deposit, plus the lost interest from the date of the deposit. Disgorgement would seem to be the appropriate remedy. The plan could certainly accept a check drawn on this bank account for that purpose.

But there is also another issue. Presumably, the check was payable to the trustee of the plan. It was clearly inappropriate for the bank to allow the trustee or a nontrustee to negotiate that check and deposit the funds into a nontrust bank account. The trustee, or other fiduciary, could probably recover from the bank even if the breaching fiduciary doesn't make up the loss to the plan.

I disagree with Dave Baker's analysis that the borrower failed to make a timely loan payment because of the fiduciary's mishandling of his check. The borrower clearly tendered payment to a plan fiduciary. His check was a plan asset as soon as the fiduciary took custody of it. The borrower does not indemnify the plan against a breaching fiduciary's mishandling of plan assets. The Plan's claim is against the breaching fiduciary and maybe the bank, not the borrower. Would the borrower be out of luck if the fiduciary simply embezzled the funds. I can't imagine that a court would seriously consider this to constitute a default under the note.

[Edited by PJK on 07-14-2000 at 06:13 PM]