Plan Termination Participants paid from wrong account

[Dougsbpc]

We administer a small profit sharing plan for a physician with a total of 9 participants. All plan assets are pooled.

The physician retired in June 2025. He let us know he retired in November 2025. So we had him terminate the plan effective 12/31/2025.

They had 3 employees terminate employment in late 2024. We provided benefit elections to the 3 and they returned the executed benefit elections. In early May 2025, we provided an instruction letter to the physician who is also the sole trustee of the plan to distribute benefits as the participants had elected. Instead of paying their benefits from plan assets he paid them from his company checking account. This even though the instruction letter specifically told him to pay these benefits from the plan.

At this time we want to wrap up this termination by distributing to all remaining participants. We thought it would be a matter of reimbursing the company from plan assets for those participants that were mistakenly paid from the company checking account. However, we just found out that his company checking account no longer exists.

What would you do?

Thanks.

 

[Peter Gulia]

Is there any reason the company would not open a new bank account?

[Artie M]

Your recitation of the facts imply that the participants were paid the exact benefits owed under the qualified plan and the employer simply used corporate/company cash as an administrative convenience.  If this is the case, the employer has an argument that it satisfied plan liabilities on behalf of the trust and the trust should reimburse the employer.  This is akin to the employer advancing expenses for the trust.  But I worry if everything was done properly if the distributions were not processed through the plan.  Were proper Forms 1099-R provided, withholding (if any) correct, spousal consent (if required) obtained, rollover rights provided, etc.,.  Also, need to look at the plan to determine what is permitted if there are excess assets in the plan.  The DOL or IRS could argue this is a reversion.  Wouldn't seem right but they could do that.  or even that there is some prohibited transaction if paid.   If the plan and trust documents, including the termination amendment, only permit payment of benefits, payment of expenses, reallocation of residual amounts, then the reimbursement may be questioned.   At a minimum, you should ensure that all plan liabilities have been paid off before returning the "excess" to the company/physician.  At that point, it could be documented that all participants received their plan benefits, the plan had no more liabilities, remaining assets are economically duplicative ad the reimbursement merely prevents unjust enrichment by the participants.  One should attempt to be able to make the alternative arguments  first the employer owns the excess assets and/or second the employer advanced and satisfied plan obligations that otherwise would have been payable from the trust, so the trust should reimburse the employer for those specific liabiilities previously discharged.

Once we get past those hurdles, especially all benefits paid, if the physician's company is still intact, the "reimbursible" amount arguably are owed to the company and it seems that either the amount could be wired into any account held by the company or a check in that amount could be written to the company (and providing it to the company's authorized representative).  If the company has been liquidated or dissolved and all of its creditors have been paid off, assuming the company was a solo physician PC with one shareholder and there was no sales transaction, the practical answer likely would be the residual value of the dissolved PC (which would include these amounts) ultimately belongs to the physician-shareholder.  So, if already dissolved and liquidated and all creditors were paid off, the payment likely could be made to the retired physician.  Lots of assumptions here, and of course the form of organization of the employer and state law could affect how the company's receivables are handled.

As usually just thoughts....

 

[Tax ERISA Thoughts]

While the preferred approach is to obviously have the plan reimburse the employer (perhaps with an interest/earnings adjustment as soon as possible), technically you may have a prohibited transaction (e.g., a loan by the employer to the plan, i.e., fiduciaries utilizing employer assets for plan obligations).  The employer may need to consider filing an IRS Form 5330 (Return of Excise Taxes Related to Employee Benefit Plans) and possibly a DOL Voluntary Fiduciary Correction filing depending on the underlying facts). Many employers/plan sponsors will likely choose to make the plan reimbursement (no harm/no foul) without a filing and take the position that the IRS/DOL will not pursue if no loss in benefits/harm to participants or the ultimate amount of plan assets; others may treat as simply an "administrative error." Other considerations may include, e.g., possible violation of any reps and warranties in sale agreements or other financial commitments (if a prohibited transaction). Also, Form 5500 (under penalties of perjury) has a line asking whether there have been any prohibited transactions during the year; also, the independent auditors for the plan (if the plan size requires an independent audit) may flag the corrective transfer in their opinion.