Affiliated Service Group

An interesting situation has arisen and I'm looking for any and all opinions.  Company A is a physician's office and the Company A 401(k) Plan has been around for 20 years - one owner/doctor with a dozen employees.  The owner reached an agreement to "partner" with a large organization which created an Affiliated Service Group (ERISA counsel confirmed) back in 2021.  In the pile of paperwork the owner/doctor signed was a "participation agreement" with the large organization's 401(k) plan that was to be effective 1/1/2023.  That agreement is a boilerplate 1-page joinder agreement.

The Company A 401(k) Plan is never frozen, terminated, or merged, and the participants continue to participate in this plan to this day (Feb 2024). The owner/doctor and his employees never intended to participate in the large organization's 401(k) plan - in essence, he was slipped a piece of paper and signed it without knowing what it was about (not an excuse, but not unusual in my experience with physicians).

The large organization is now demanding Company A cease operating the Company A 401(k) Plan, return all 2024 contributions to the Company A 401(k) Plan as a "mistake-of-fact", and start participating in the large organization's 401(k) plan by the end of February 2024.  The employees have never been provided enrollment materials, the SPD, or any other documentation for the large organization's 401(k) plan.  They have deferral agreements in place with Company A and the Company A 401(k) Plan so I don't see how a mistake of fact would apply.  Also, since the "participation agreement" has an effective date of 1/1/2023, I don't see how trying to back-out 2024 contributions from the Company A 401(k) Plan fixes anything.

The owner/doctor doesn't want to change the plan he has in place and wants to disregard the "participation agreement" that he never would have signed had he known what it represented.

1. Has anyone come across a similar situation and if so, what was the outcome?

2. Is the "mistake-of-fact" correction being thrown out there by the large organization appropriate?

3. If the doctor just ignores the large organization's "participation agreement", and continues to keep the Company A 401(k) plan active, are there any issues he should be warned about (other than coverage testing)?

4. Any other comments/suggestions are very welcome.

Forward all questions to the ERISA counsel used in 2021.

Sounds like ERISA counsel should be involved.

As to 3, you have an ASG so the Plans are going to need to pass testing as group and that may or may not be problematic for Plan A, the Larger Plan, or both.

I wish we could just go back to the ERISA counsel that made the ASG determination.  Unfortunately they were hired by the large organization and nobody wants to divulge the information to the friendly neighborhood TPA.

It sounds like you are TPA to the Doctor's plan, I would recommend the Doctor engage his own ERISA attorney to review the matter and see what needs to be done. Which may or may not involve a VCP filing for 2023 and or 2024 to get the IRS blessing on any fix that may be required..

I will say "I didn't read the document I signed and didn't understand what it does" is probably not going to be the best defense for Doctor A, but then I'm not attorney so don't construe this as legal advice.

I don't think signing a participation agreement, on its own, would stop the doctor's practice from continuing to sponsor its own 401(k) plan; it would just participate in two plans, both within an ASG, with the corresponding compliance testing issues. 

With that said, there probably is some sort of contractual arrangement between the doctor's practice and the larger organization. It may have rights, obligations, restrictions, etc. (e.g., "during the term of this agreement, doctor's practice shall not maintain a qualified retirement plan other than through its participation in large org's plan") with contractual remedies if breached. This is obviously outside the scope of the 401(k) plan compliance alone, but could come into play if the doctor "disregards" the participation agreement. As Lou notes, "I didn't read or understand what I signed" usually is a poor defense, especially if counsel was involved at the time. 

Let me guess - the doctor never engaged counsel (ERISA or corporate) to review the agreement he signed with the larger organization because why would he need one? What could go wrong? Why would he spend the extra money?

This is why.