Can an ER deposit lost earnings if deferrals were segregated but not invested?

[OrderOfOps]

The circumstances are that this is 401(k) Plan in transition from one TPA/RK to another. At the previous TPA/RK each individual had a separate account, while at the new TPA/RK there is a core account in which investments are pooled, daily valued with individual balances tracked by RK - the individual accounts (which function the same as a brokerage portal at the custodian). Functionally, each individual had a brokerage portal with the custodian that are then all associated with the Plan's master Trust Account - now that is one investment option available for them, or they can invest in mutual funds in the main account.

During the transition period, an EE entered the Plan; the prior RK would not establish an individual account for this EE, as the Plan was deconverting, and the receiving RK was unable to create an account for them as the master Trust Account & associated individual accounts were not yet registered to the new RK. There was a 'master' Trust Account in the Plan that the deposits flow into and are then transferred to each individuals account accordingly; these are actually separate accounts.

Because the ER was not able to get an individual account opened for this individual, their deposits were sent to the master Trust Account and sat there in cash, uninvested. AFAIK this was not an interest bearing account. Once the transition was completed, the individual completed enrollment including setting an investment allocation and the funds were then invested according to their allocation in the core account.

My understanding is that since the deferrals were segregated from the ER's general accounts and deposited in the Trust Account albeit uninvested, they were not considered late deposits. The issue posed by that is potential liability due to a fiduciary breach.

1. The question at hand is if the ER can allocate lost earnings for this participant for the period they were unable to direct their investments. The ER would like to do so, calculated according to the VFCP calculator.
2. Would depositing lost earnings mitigate their potential liability, if permissible?

[MoJo]

Late deposits are a prohibited transaction.  Not making the assets productive (i.e. investing them) *may* be a fiduciary breach.  If the fiduciary does determine a fiduciary breach occurred (based on the facts and circumstances of the situation), then the fiduciary *must* correct the breach.

I'm on the fence as to whether or not the situation you described is a breach.  The plan, apparently, was in a blackout.  Hopefully an appropriate SOX notice was provided to the affected EE. If not, well that is another issue to contend with - as that employee did become a participant, albeit one who's contributions weren't invested....

The appropriate correction method is another issue.  VFCP calculators, as I read the rules, is a "last resort" method, after the others described.

[OrderOfOps]

I'm not sure if the Plan was considered to be in a blackout. Because of all participants being in individual brokerage accounts (functionally), they were still able to fully direct their investments. The transition was just reassigning the TPA/RK access from one firm to another and then getting all relevant data into the new RK platform. I do not see that there was a blackout notice furnished, but I'm being brought onto this and was not part of the entire process so I could be wrong in that regard. 

I'm not personally familiar with corrections for a fiduciary breach in general or for this instance in particular (I'm working as the research arm for this), and I don't where this would fall among the 19 VFCP correctable categories of transactions. How would you go about correcting this fiduciary breach, if you considered it one? 

To reiterate, the ER wants to deposit calced late deposits as lost earnings (so not subject to ER contribution limits or considered in the EE's annual additions limit), so we're trying to determine if that is permissible.

[Peter Gulia]

If the question is may an employer restore a participant’s account for a loss that resulted from what might have been a fiduciary’s breach in planning or implementing a plan-administration change, a Treasury rule allows, as not an annual addition, such a restorative payment.

“A restorative payment that is allocated to a participant’s account does not give rise to an annual addition for any limitation year. For this purpose, restorative payments are payments made to restore losses to a plan resulting from actions by a fiduciary for which there is reasonable risk of liability for breach of a fiduciary duty under title I of the Employee Retirement Income Security Act of 1974 . . . (ERISA) or under other applicable federal or state law, where plan participants who are similarly situated are treated similarly with respect to the payments. Generally, payments to a defined contribution plan are restorative payments only if the payments are made in order to restore some or all of the plan’s losses due to an action (or a failure to act) that creates a reasonable risk of liability for such a breach of fiduciary duty[.]”

26 C.F.R. § 1.415(c)-1(b)(2)(ii)(C) https://www.ecfr.gov/current/title-26/part-1/section-1.415(c)-1#p-1.415(c)-1(b)(2)(ii)(C).

An employer need not concede that there was a fiduciary breach; it’s enough to find there is a reasonable risk.

The amount added to an account as restoration must not exceed the loss caused by the fiduciary’s arguable breach.

This is not advice to anyone.

[OrderOfOps]

58 minutes ago, Peter Gulia said:

If the question is may an employer restore a participant’s account for a loss that resulted from what might have been a fiduciary’s breach in planning or implementing a plan-administration change, a Treasury rule allows, as not an annual addition, such a restorative payment.

“A restorative payment that is allocated to a participant’s account does not give rise to an annual addition for any limitation year. For this purpose, restorative payments are payments made to restore losses to a plan resulting from actions by a fiduciary for which there is reasonable risk of liability for breach of a fiduciary duty under title I of the Employee Retirement Income Security Act of 1974 . . . (ERISA) or under other applicable federal or state law, where plan participants who are similarly situated are treated similarly with respect to the payments. Generally, payments to a defined contribution plan are restorative payments only if the payments are made in order to restore some or all of the plan’s losses due to an action (or a failure to act) that creates a reasonable risk of liability for such a breach of fiduciary duty[.]”

26 C.F.R. § 1.415(c)-1(b)(2)(ii)(C) https://www.ecfr.gov/current/title-26/part-1/section-1.415(c)-1#p-1.415(c)-1(b)(2)(ii)(C).

An employer need not concede that there was a fiduciary breach; it’s enough to find there is a reasonable risk.

The amount added to an account as restoration must not exceed the loss caused by the fiduciary’s arguable breach.

This is not advice to anyone.

Thanks Peter, I think this in conjunction with MoJo's response addresses my question very satisfactorily. You were both very helpful.