minimal underpmt of 401(k), but participant already termed & distributed

[TPApril]

Upon review, it was determined a participant's 401(k) that was withheld from his paycheck in the amount of $35 was not deposited. Participant has since terminated over a year ago and took a full distribution. Recordkeeper refuses to reopen the account without new enrollment paperwork.

Thinking to have the amount deposited to the Forfeiture account and be done with it.

By the way, in terms of delinquent contributions, this is the only amount.

[Bill Presson]

FWIW, I would look to find a new RK. 

[BG5150]

Um, no.  This was a deferral that the participant had deducted from their paycheck.  It's THEIR money!

So now it's a late deposit and they are owed earnings.

Tell the R/K this is a plan correction and they MUST re-open the account.  Are these brokerage accounts?

 

[TPApril]

It's a standard recordkeeper, not a brokerage account.

Ultimately, participant will never get that $35 due to distribution fees which will end up going to the recordkeeper themselves.

[Paul I]

If the $35 was not deposited, then the employer still has the deferral.  If funding the plan and lost earnings would result in the recordkeeper pocketing the amount funded as a payment processing fee, then the former participant still loses.

The company should not keep the $35.  They could consider writing a check to the former participant for the $35 plus lost earnings plus a gross up for taxes, and report it on a 1099-MISC.  If the former participant did not rollover their distribution, then they are kept whole plus a little bit.  If the former participant did rollover their distribution to an IRA, they may be able to make a contribution to the IRA, and they are kept whole plus a little bit more.

Document the whole transaction and I cannot imagine any agent or investigator having a problem with it.

[TPApril]

Paul - thanks, and i do recognize this is a message board, not formally legal advice.

my other idea up top was to put it right into forfeiture account to reflect formally going into the plan.

[Bri]

Have the plan deposit the $35 in a checking account in the name of the plan and pay the guy from there, no fee.  If the employer messes up 10 times, does the recordkeeper get to milk the guy's account ten times?

[Artie M]

First, I don't think the forfeiture is appropriate. It was a deferral that should not be forfeited.  If forfeited, it will either be used to pay employer expenses, employer future contribution, or allocated to other participants.  The first two are clearly advantageous to the employer and the latter is likely not what is in the plan.

Second, seems to me reopening the account should not be an issue.  That seems like a system issue.  If they can't reopen the account, how do they process any corrective allocations after a participant has taken a complete distribution.  Seems like they could temporarily reestablish the account, allocate the $35 and earnings and immediately process the distribution.  This is what we see most often.  Your fact say all the amounts will end up going to the RK since the distribution cost is more than the deposit plus earnings.  However, this would not be a participant-initiated distribution, it is a corrective distribution resulting from a Plan's operational failure. Presumably, the participant already paid the distribution fee when they took their full distribution.  If I were the participant my question would be:  why do I have to pay again for the company's failure?   The Plan (if permitted under the plan's terms) or the employer should absorb the distribution/administration cost.  If the RK absolutely cannot waive the distribution fee, I would recommend depositing $35 plus earnings, (agreeing with @Bri) paying the $ administrative charge with participant receiving the full corrective amount.  Back to the RK, question them as to how they process post-distribution operation corrections, EPCRS corrections QDRO adjustments, late contribution corrections, etc.   I would push the RK on the procedure, not the fee.  They have to have a method to use in other instances. 

Last, an additional issue:  If this is a participant contribution that was actually withheld from payroll, this is also a late deposit under the DOL rules.  It seems they missed elective deferral deposit, need lost earnings, potentially a prohibited transaction, and possible Form 5330 considerations depending on timing and correction.  The excise tax likely will be almost nothing but it likely still is subject to the excise tax.