2021 Cash Balance Plan Start-Up that hasn't been funded yet

[Brob69]

A National TPA firm, which has a lot of turnover, is handling a Combo Plan for a Law Firm handling criminal law.  The Law Firm thought they were going to implement a Cash Balance Plan in 2021 (yes, 2021) and apparently the message didn't get across, but they signed paperwork to start it.  

TPA firm is talking to them about penalties and have sent them an email on this.  The plan has never been funded.

Can they just pretend that it never happened?  They don't want it opened. What are their options?  

I previously worked for a TPA firm and we set up a Safe Harbor 401(k) Plan for a 20 person construction company in November 2022 to start on 1/1/23.  They never sent out notices about the Plan being started and no contributions ever came in.  We checked with them and they decided they didn't want to do it, so we just allowed them to get out of it as though the Plan never existed.

Can the Law Firm treat this the same way?  Apparently, the TPA has set up a meeting and bringing their ERISA Attorney in.

[Brob69]

Correction, I"m now finding that the Cash Balance was intended to be set up for the 2022 Plan Year, and all of the other facts remain the same.

Wanting to also wish a Happy Thanksgiving to everyone out there in our retirement plan community, and thank everyone in advance for reviewing and possibly commenting.

[Lou S.]

Did they actually sign a plan document and forget they signed it?

Because if they did sign a plan document, they have created a contract that promises certain benefits to their employees.

Now why this is coming up in 2024, four plan years after the first one is a mystery to me. Is this coming up now because they sent out Cycle 3 restatement letters and just realized they had no data, no valuations and no 5500s for 2021, 2022 and 2023?

Now if they didn't actually sign a plan document, that's a different story because then you don't have a plan.

I don't want to think about the penalties for failure to meet minimum funding or what they might owe to the plan should they have to correct this. But the client may want to consider bringing their own ERISA attorney to that meeting.

[truphao]

It sounds like they signed the Plan Doc ("the paperwork").   Dittoing Lou why is it coming up only now?  If Plan was set up it is the TPA duty to follow up with the "action plan".  If that happened, and and it is the the client who dropped the ball and never returned phone calls/messages, the TPA should have resigned at some point. It is the time for lawyers to get busy.  Maybe it is the time to stop "sell now, and we will figure out how to deliver later" culture at the big TPA firms?

[Peter Gulia]

Even if no one in a might-be plan sponsor has a practice anywhere near employee benefits, someone might know or find an employee-benefits lawyer who could render advice.

Brob69’s description of the story suggests some possibilities that there might be facts from which a lawyer could render written advice that no plan was established.

In seeking a lawyer’s advice, a might-be plan sponsor might want to act carefully to preserve evidence-law privileges for confidential lawyer-client communications.

This is not advice to anyone.

[Brob69]

I appreciate the comments.  We talked to the TPA firm today.  The Cash Balance Plan documents were signed on 4/13/22 and the Plan was initially supposed to be effective for the 2021 Plan Year.  The TPA firm never billed them and the Plan never got through implementation.  Since that point, there has been little communication from the TPA about the Cash Balance Plan.  One would think that they would've picked up the phone on or before the 2021 minimum funding deadline and had a conversation with them about things, but they didn't.  Not sure why they are bringing this up now?

[Lou S.]

That sounds ugly. Good luck. As to why now? Like I said earlier it probably got flagged as needing a Cycle 3 restatement and someone just realized they were missing 3 years worth of actuarial valuations, 5550s, and all the data.

If they are going to fix it right they need actuarial valuations and testing for 2021, 2022, 2023.

DFVC filing of Form 5500 for same years.

5330 Excise tax for failure to meet minimum funding for the same years.

Oh and 3 years worth of contributions with penalties and interest.

And this being December, they probably have accruals for 2024 as well.

[truphao]

no AFTAP certifications for 3 years either - not sure if there are any practical implications or not (< 5years), but let's add this to the list for fun.

[Bri]

Could always look for a loophole in what they executed for the adoption after the end of the plan year.  Maybe they didn't check a box they should have about it applying as a retroactive adoption, that kind of thing.

(Checks open palm, no sign of straws affirmatively grasped.)

[Effen]

I like to look for practical solutions...Not sure all the blame goes on the TPA as the plan sponsor apparently chose to ignore it as well, or have they been making contributions? 

Sounds like you have a signed plan document, but "never implemented" (not sure what that means), never communicated to anyone, never funded, never filed, no 5500, no SPD, no AFN, no bills, no one at the DOL/IRS/PBGC knows it exists, no participants no it exists ,,,seems to me the practical answer is, shred the signed doc, go forth and sin no more, but I would not put that in writing.

I think what you can do is only agree to work on a newly adopted plan.  You don't want anything to do with the "old" plan as trying to fix it will be a black hole of lost revenue for everyone.

[Lou S.]

Sweeping it under the rug is one option. Not sure that's the best or most ethical option but it is one option. they can fix it correctly which is probably going to be expensive, or they can pretend it never existed but I don't think I'd want to be involved with that decision or that potential client if sweeping it under the rug is the their answer.  You can let them do that in conjunction with their attorneys advice. If you are an actuary, you're going to be bound by a code of ethics for your various organizations which would make it hard to have them as client and look away at the same time.

And sure the Plan Sponsor who originally signed the document probably deserves the lion share of the blame in this.

[Peter Gulia]

About not blaming the TPA, consider that we don’t know the terms and conditions of the TPA’s engagement.

[Lou S.]

21 minutes ago, Peter Gulia said:

About not blaming the TPA, consider that we don’t know the terms and conditions of the TPA’s engagement.

The TPA's "blame" is a very wide range of outcomes in this scenario. From little to none at all if the client was non-responsive to their requests for information, though as pointed out earlier in the thread, perhaps they should have resigned if that was the case, to what were they thinking putting in a plan and not following up with the client?

[Gina Alsdorf]

If it was never funded, was there ever a trust?  A trust needs a Res. Can a plan document alone create a plan?  Especially if no notice is given to anyone (you are silent on that here).  These are the questions I would ask.

[Brob69]

Appreciate all the comments.  

We talked to the Administrator for the National TPA.  Learned that they outsource the Actuarial work.  The Administrator was under the impression that a 5500 wasn't needed until the assets got to $250k. Again, the client, a law firm, has employees.  

The Administrator checked back with his team and responded to us via email.  Please take a look at his reply below in bolded italics and let me know your thoughts:

Our firm is required to file a form called "Volume Submitted Defined Benefit Plan" with a list of plans on an annual basis to the IRS. This form includes a list of DB plans that our firm has assisted with during the year. Since this plan was adopted in 2021, it would have been reported to the IRS on our Volume Submitted in 2021.

Ultimately, the decision on how to proceed rests with the plan sponsor. However, to properly address the situation, we recommend the following steps:  

1. Obtain a restoration quote to bring the plan into compliance for all plan years since 2021.
2. Make the necessary minimum required contribution and address any penalties for unpaid minimum required contributions.
3. Amend the plan to declare plan termination and distribute the plan assets.

Please let me know if you would like us to provide a restoration quote or if you prefer that we proceed with our firms resignation. Our firm will be unable to continue with the plan administration unless the plan sponsor is willing to bring it up to compliance.

I think he's a little confused (or maybe I am)?  I talked to an Actuary friend with 30 years experience and he's not aware of a list of plans needing to be sent to the IRS.  He also heard an ERISA Attorney one time say that there was a precedent that said "Plan was never funded, so the trust didn't exist, so the Plan never existed."

Yea, I've heard of Volume Submitter Defined Benefit Plan, but he's saying Volume SUBMITTED Defined Benefit Plan? 

 

[Brob69]

Responding to Gina (and THANK YOU), yea the Trust was never funded.  No monies were ever funded into a Plan.  Nothing was ever sent to employees because they never had an implementation call.  Only ones that know about anything is the TPA, Advisor and Owner.  

Doesn't seem that the TPA ever approached them about funding the Cash Balance prior to the minimum funding deadline for 2021.  

Just can't figure out whey they're bringing this up now.

[Gina Alsdorf]

In those circumstances, I think a discussion is merited and considerations need to be given what actually happened.  An ERISA attorney can discuss options and help define risks.  Was the plan supposed to be cross tested with a 401(k) Plan?  (Asking because I am curious). 

[Brob69]

Yes, supposed to have a 401(k) that's cross-tested.

 

[Lou S.]

1 hour ago, Brob69 said:

Just can't figure out why they're bringing this up now.

Because the Plan needs a Cycle 3 restatement by 3/31/2024 and they are on their list of maintained documents. 

It seems this TPAs implementation, document, administration, client communication, and actuarial services appear to require a bit better coordination.

 

[truphao]

let's not overlook that the Trust might have been already created when somebody (the TPA?) has apllied for the EIN for the Trust.  Thus, IRS "might already know" about the Trust.  I am totally with Lou regarding the codes of ethics and Standards of Actuarial Practice that certified actuaries must (and should want to) live by. This mess is really messy.  I personally would not be comfortable touching this without an ERISA counsel.

Regarding who is here to blame - this is definitely a client's fault for dropping the ball.  Nevertheless, the TPA should have taken some action - IMHO.  This sentense "The Administrator was under the impression that a 5500 wasn't needed until the assets got to $250k" highlights the issue.

 

[Gina Alsdorf]

It sounds like it was reported to the IRS in other fashions as well. This is messy. No question. 

[Lou S.]

21 hours ago, Brob69 said:

Yes, supposed to have a 401(k) that's cross-tested.

 

This brings up so many more questions about the TPA. I assume the 401(k) is OK on its own but that's probably not a good assumption on my part.