Sponsor can NOT fund the 401k Plan's Matching

[AllThingsForGood]

When a client simply has NO money, are there remedies?

Small 401k Plan, 8-10 total participants. One shoe store bought a 2nd shoe store in 2021. Owner declared Match for 2021 and again in 2022 (both years totaling about $12k). Owner never participated himself. It's a mom-n-pop situation, and the books were kept a little 'loosely'. Owner was in a terrible car accident in 2025, to the point that I'm now working with his son. 

2 issues here:

Issue #1 (the main problem) is that the owner has no money, and still owes the 401k (pooled) account about $4,300 in order to fully fund the Match from those 2 years. (I know, we're years past when it should have been deposited -- I KNOW.) He now doesn't have the $4,300.

The 2nd issue is that the corporate tax returns only claimed $10k as Match expense (vs the $12k that was declared and reported on the 5500s). This 2nd issue may be irrelevant, and the client is reaching out to their tax "preparer" to get his input.

I want to help this client, but I'm not sure what to even suggest.

[AllThingsForGood]

I need to add:

This is NOT a safe harbor Match. The owner never participated in the Plan.

The only 3 sources the Plan has ever had are Deferrals, Disc Match, and Rollovers.

 

If I've posted my question in the wrong forum, please let me know and I'll move it.

[Peter Gulia]

Considering the documents governing the plan and the plan sponsor’s acts, was a matching contribution owed?

When you say “no money”, how confident are you that neither the business organization nor any owner has money or other assets?

(An owner might not lack assets unless both shoe stores are worthless.)

Has the business failed to pay other creditors?

Or worse, has the business paid other creditors to the disadvantage of one or more employee-benefit plans?

Should the retirement plan’s fiduciary correct the 2021 and later years’ Form 5500 reports to disclose prohibited transactions?

Should the retirement plan’s fiduciary evaluate whether to submit a claim to the plan’s fidelity-bond insurer?

If the business is unable to pay its debts as they come due, should the business file a voluntary bankruptcy petition?

Should the retirement plan’s fiduciary evaluate whether the plan, as a creditor, should file a petition for the business’s involuntary bankruptcy?

If a plan’s administrator (often, the plan sponsor business organization) becomes a debtor in a liquidation bankruptcy, the bankruptcy “trustee shall . . . continue to perform the obligations required of the administrator.” 11 U.S.C. § 704(a)(11).

No matter how thoroughly competent an adviser is about the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code, an adviser might lack knowledge about how a business organization or a human should deal with creditors in ways that do not improperly favor some other others, or improperly fail to give an employee-benefit plan the preference due to it.

Although many TPAs and other nonlawyer service providers often provide some ERISA and tax advice incident to one’s services, advice about an employer’s insolvency might be beyond a service provider’s contracted or customary scope.

Courts impose liability on a nonlawyer for giving incorrect, or even incomplete, advice. Moreover, a nonlawyer who provides legal advice is held to at least the same standard of care and expertise as a competent lawyer. Restatement (Third) of the Law Governing Lawyers § 48 (Professional Negligence—Elements and Defenses Generally) reporter’s note on cmt. e (A.L.I. 2000); see also Restatement (Third) of Torts: Liability for Physical and Emotional Harm § 14 (Statutory Violations as Negligence Per se) (A.L.I. 2010 & Supp. 2026).

This is not advice to anyone.

[AllThingsForGood]

13 minutes ago, Peter Gulia said:

Courts impose liability on a nonlawyer for giving incorrect, or even incomplete, advice. Moreover, a nonlawyer who provides legal advice is held to at least the same standard of care and expertise as a competent lawyer. Restatement (Third) of the Law Governing Lawyers § 48 (Professional Negligence—Elements and Defenses Generally) reporter’s note on cmt. e (A.L.I. 2000); see also Restatement (Third) of Torts: Liability for Physical and Emotional Harm § 14 (Statutory Violations as Negligence Per se) (A.L.I. 2010 & Supp. 2026).

Oh my gosh, THANK YOU. I was literally (truly!) about to hit send on an email to the owner's son.

I was SO hoping you'd be the one to reply, Peter, because I found an older similar dilemma on these forums that you spoke to. Your wise words were to (1st!) make sure I'm paid, and then to just keep the Plan open to accept deposits. I'm sure I'm not quoting you correctly, but I got the gist and I was so grateful to have found that post. In my email to MY client, I was telling them that they'd need to fund, and that we'd simply file a 5500 each year until it's funded and distributions are completed. I'm going to add in about this whole situation being beyond the scope of my responsibility.

My next question you've also answered -- what if the business closes, how does a Plan get funded from nothing? Bankruptcy is the answer, and certainly not in my scope!!

 

I'm so grateful! Thank you.