Forfeiture Question

[austinh2591]

Hi there - our plan recently had the forfeitures reallocated automatically due to "pass through processing" and they were distributed to plan participants (myself excluded). We had intended to use these for plan expenses and told the recordkeeper this back in March, however, they did not do so. We've asked the recordkeeper to reverse the transaction, but they will not and are requesting a hold harmless letter and want us to take on the risk.

They mentioned there could be a fine or penalty for removing funds from the participant's account, although they incorrectly allocated to them in the first place. My questions are:

 

1)            What the fine would be if this reversal came up in an audit?

2)            What the risk is that this reversal would cause an audit for a small plan filer?

3)            Would an auditor be understanding since the recordkeeper has even confirmed via email that we had requested the fees be applied to plan expenses back in March?

[C. B. Zeller]

How are you planning on reversing the transaction if the amounts were already distributed? Also who is "we" in this question - are you the plan sponsor, the TPA, or someone else?

If the recordkeeper decided on their own to allocate the forfeitures then they may have become a fiduciary, and therefore could have legal liability for their actions. However fiduciaries don't have a duty to reduce costs to the plan sponsor. The only way I can think that they could get in trouble for this would be if the plan sponsor decided to charge the plan-related expenses against the participants' accounts, and a participant sued over those fees.

The plan sponsor might want to have their lawyer send the recordkeeper a little love letter - hopefully dropping the "f word" on them might get them to take it seriously.

However, the plan sponsor should also carefully review their service agreement with the recordkeeper, and their plan document, especially if the plan document was prepared by the recordkeeper, before doing anything else. There could be a provision that says that any forfeitures remaining in the plan after X period of time will be allocated to participant accounts. If that is the case then the recordkeeper would have been performing a purely ministerial function by allocating forfeitures in accordance with the plan document, or the written agreement of the plan sponsor.

[Bill Presson]

Agree with CB. Also look at just having the fees paid by the plan and deducted from participant accounts. Likely won't be deducted exactly like they were allocated, but might be close enough. And save a lot of heartache.

[austinh2591]

Apologies for my lack of clarity. I'm the plan sponsor and the forfeitures were placed in participant accounts, not actually dispersed from the plan. the recordkeeper has offered to reverse this, but only with a hold harmless letter. I reviewed the plan document and it only mentions "pass through processing" for loans/distributions. Nothing related to forfeitures.

[FORMER ESQ.]

Did the record keeper indicate why they allocated the forfeitures despite acknowledging their mistake? 

If the plan document gives the plan administrator the discretion to use the forfeiture account to pay for plan expenses, the plan administrator choses to do so, and that decision is (timely and properly?) communicated to the recordkeeper, then the proper course of action is to return the money from participant accounts.

The plan sponsor should not have to sign a hold harmless letter for a mistake made by the recordkeeper. In fact, unless there is something in the record-keeping agreement that requires the recordkeeper to allocate the forfeitures, I would write a letter back to them and say because you used your discretion to override the plan administrator's explicit direction, you are now acting as an ERISA fiduciary.  They hate the "f" word. We will not sign a letter for your mistake. In fact, we  will change our communication to participants and include your name as an ERISA fiduciary with respect to certain plan functions. 

[Luke Bailey]

2 hours ago, FORMER ESQ. said:

If the plan document gives the plan administrator the discretion to use the forfeiture account to pay for plan expenses, the plan administrator choses to do so, and that decision is (timely and properly?) communicated to the recordkeeper, then the proper course of action is to return the money from participant accounts.

There is some logic here, but I would be wary of it. Assuming, as is the typical case, that the plan document says something like, "Forfeitures shall be allocated to participants as additional contributions unless, in the discretion or the plan administrator, they are used to pay expenses," then there is a strong argument they have (a) been allocated, and (b) not used to pay expenses. This is an administrative error, not a mistake of fact, and not an operational error of not following plan document. Bill Presson has described a way above that can probably recoup most of the money, and I would definitely explore that, as well as some of the other potential courses of action explained above.