A Real Problem

[rblum50]

I have a long time client that has both a 401(k) Plan and a Cash Balance Plan. These plans have been in place for quite a while and each has 1 -2 million in assets. Here's the problem, the defined benefit plan's assets consisted of all CD's. As they all became due during 2025, the proceeds from the CD's were mistakenly transferred to the 401(k) plan leaving the DB plan with zero assets. 

I don't see any good solution for this problem. If I was pressed, I would suggest transferring the assets back into the DB plan with an estimated income adjustment. Using this approach, how much risk would there be if the plan would be audited in the future? Could the risk potentially be as great as a disqualification of both plans?

[CuseFan]

Agree with your suggested solution but also strongly suggest some formal legal guidance which could also ascertain risk. I would not "cheap out" given the size of the assets. Other key thoughts: who made the mistake, when did it occur, when was it discovered, and how soon thereafter was it corrected? Was this one big errant transfer or a series of errant transfers? Were they caused by honest clerical errors or was someone asleep at the wheel not paying attention. Was this the plan sponsor's doing or a third party? Documenting all that and fixing ASAP at a minimum is what I would suggest - put the plans where they'd be had the mistake(s) not occurred. Maybe a VFCP filing would be appropriate.

My only formal advice here - get qualified legal guidance.

[Peter Gulia]

Consider also that only communications with one’s lawyer for the purpose of getting the lawyer’s legal advice can get that evidence-law privilege.

[Bill Presson]

Any way to amend the trust so that a single trust holds both plans assets rather than moving dollars? I would have legal counsel opine because I don’t know that it can be done after the fact. But we do know it can exist. 

[david rigby]

Although not recently, we used to see mistakes where Plan A contribution was mistakenly deposited into Plan B.  The solution was simple: just transfer it to the correct location/trust.  If you need an adjustment for earnings, make a reasonable estimate and do it.  But do it immediately, and document it completely.

[Bri]

This really should be addressed in future EPCRS because it's more common (plans' assets getting mixed up between them) than half the stuff they worry about in the Rev Proc as it is!

[Peter Gulia]

And, beyond tax-law corrections, an eligible correction under Labor/EBSA’s Voluntary Fiduciary Correction Program (because the Treasury/IRS lacks authority regarding ERISA title I fiduciary breaches).

Expenses for a correction should be the personal responsibility of the breaching fiduciaries.