Ineligible Participants Allowed To Defer

[metsfan026]

I have a potential client who is having issues with 2021/2022 contributions.  It appears that the prior TPA allowed ineligible participants to defer into the Plan.  What is the normal procedure in this case?

If the money is returned, does the employer have to make the employees whole if the investments are down?

[Bill Presson]

There might be a couple of fixes: return the money, amend to let the few participants in early, etc. All, I think, based on the numbers of people.

But, just to snipe a bit, I'm betting the TPA didn't allow ineligible participants to defer, it was the HR/payroll people for the employer.

[metsfan026]

5 minutes ago, Bill Presson said:

There might be a couple of fixes: return the money, amend to let the few participants in early, etc. All, I think, based on the numbers of people.

But, just to snipe a bit, I'm betting the TPA didn't allow ineligible participants to defer, it was the HR/payroll people for the employer.

I'm not pointing fingers, so hopefully it didn't come off like that.

If they opt to return the money, do they have to make them whole for any investment loses?

[Bill Presson]

1 hour ago, metsfan026 said:

If they opt to return the money, do they have to make them whole for any investment loses?

I would recommend doing so.

[BG5150]

16 hours ago, Bill Presson said:

I would recommend doing so.

Why is that, Bill?

[Bill Presson]

1 hour ago, BG5150 said:

Why is that, Bill?

Generally, the plan either refunds the amount to the employee or forfeits the money and makes the employee whole outside the plan. The goal is to put the employee and the plan back in the same place they would have been if the employee hadn't entered early. I interpret that to disgorge deferrals plus gain or makeup the loss. If the plan forfeits the deferral (and it had a loss) and makes the employee whole outside the plan, the employee would be better off than a refund minus a loss.

[EBP]

On 8/2/2022 at 3:50 PM, Bill Presson said:

I would recommend doing so.

It's always safer to err on the side of the participant, especially since in most cases, the losses will be minimal and therefore the cost to the employer also minimal. Generally, it's a small price to pay to appease the participant and the IRS. But maybe your facts are different in this case.

I would think that in general it would be easier to do an EPCRS amendment to let those employees in early and not worry about returning money or any investment losses. Just amend it and leave everything else alone. Much simpler and less time-consuming for everyone.

 

[Luke Bailey]

4 hours ago, EBP said:

would think that in general it would be easier to do an EPCRS amendment to let those employees in early and not worry about returning money or any investment losses. Just amend it and leave everything else alone. Much simpler and less time-consuming for everyone.

That would be my recommendation too, EBP.

 

4 hours ago, EBP said:

It's always safer to err on the side of the participant, especially since in most cases, the losses will be minimal and therefore the cost to the employer also minimal. Generally, it's a small price to pay to appease the participant and the IRS. But maybe your facts are different in this case.

I think Bill Presson's thought is correct that this is required, so would not be erring on side of participant. The loss is the direct result of a fiduciary's breach of its duty of care in administering the plan. Look, if you are requiring them to take the money out then you can't treat them like a participant for 404(c), probably. Not sure there is any case out there where that has been litigated, though. One might be able to argue that if they didn't qualify as participants ERISA doesn't even apply, but if that's the case the legal claims of the participants will be even stronger under state law.