Restorative Payments and Tax Deductibility

[Chris123]

So my questions concerns Restorative payments and tax deductibility for defined benefit plans -

I'm currently dealing with a situation where the DB plan trustee (employer) invested in an investment in which the investment became bankrupt and is now worth $0. The trustee later found out that the investment was a ponzi scheme and sued for recovery. As a result of the lawsuit, the trustee was able to recover a $100k settlement check, which the trustee had made payable to the plan.

My question is the following:

Can the employer contribute a restorative payment to make the plan and the participants whole?

Does a restorative payment by the plan sponsor qualify as a deductible contribution?

I found language that if a fiduciary commits a breach of his or her responsibility in picking good investments, then the fiduciary is PERSONALLY liable to make restorative payments. Everything talks about if a fiduciary has done some due diligence in selecting investments – and given that most plan sponsors are not investment professionals, it’s not like they would know everything or all the questions to ask – then it would generally NOT be the case that the fiduciary would be personally liable to make any restorative payments. I would think if the sponsor relied on the advice of someone who IS presenting him or herself as a professional, the fiduciary could not be personally blamed for the losses.

Thus, based on the above, I believe the amount could not be deposited into the DB plan but, rather, could be used to fund future contributions which, one would assume, would be greater due to the loss in the value of the plan’s assets.

[CuseFan]

As a DBP, participants are whole as the employer assumes the investment risk (unless it's a ROR CBP).

If the employer, as a fiduciary, could be considered to have committed a breach, maybe they could do a restorative contribution/payment but not sure it would be deductible. The $100k recovery must go into the plan and there is no deduction for that.

As you note, the net loss will flow through the plan's funded status and affect minimum required and maximum deductible contributions, so I would expect the employer would be able to make up the loss on a deductible basis if it so desired (unless already extremely over funded).

[david rigby]

Is this a cash balance plan?

[Mike Preston]

17 minutes ago, david rigby said:

Is this a cash balance plan?

David, why does that matter to the question at hand?

[Chris123]

Thanks for your response, Cusefan. 

It's a DB Plan, David. 

[david rigby]

While my reading is sometimes flawed, I know it's a DB plan.  I'm just trying to figure out why, as CuseFan notes, the OP want to "make participants whole". What else is going on in the original question?

[Mike Preston]

1 hour ago, david rigby said:

While my reading is sometimes flawed, I know it's a DB plan.  I'm just trying to figure out why, as CuseFan notes, the OP want to "make participants whole". What else is going on in the original question?

The OP is confused.  If the OP wasn't confused, the OP wouldn't have posted in the first place.

[Luke Bailey]

If it's a traditional DB, there is nothing to make whole, because the participants' benefit formula has not changed. It is deductible under the same rules that govern the amount that can be deducted for DB plan. This is no different than a market decline.

[Mike Preston]

I think CuseFan's response is closest to what I would say.  But I would go a bit further.  A restorative payment's deductibility may rely on the intended use of the payment by the payor.  If the payor reasonably concludes that there is significant liability/exposure then a restorative payment may be deductible as a business expense.  Lots of facts need to line up to make use of this.  I would want an attorney's take, to boot.