Is this a plan defect?

Would love an opinion on an issue with a panicky plan sponsor: 😄

Recordkeeper paid advisory fees to a financial services company for the first three quarters of 2025.
The financial services company paid the advisor fee to the advisor for the plan.
Advisor left the service of the financial services company in Q4 of 2025 and moved to financial services company #2.
Plan Sponsor and financial svcs company have a dispute and financial services company agrees to refund advisory fees for Q1-Q3 2025 ($6500)

Here's the issue - financial service company made check out to the plan sponsor's company, not to the plan.  Plan sponsor then deposited the check into their corporate bank account.

Do we have a prohibited transaction situation?  Or can the money just get pulled from the corp bank acct, put back into the plan (participant accounts) and document what occurred in the plan records and move on?

Have the plan sponsor return the money to the advisory firm and have them reissue a check (or ACH) to the plan. 

A plan fiduciary might be reluctant to send money back to the investment-advisory firm because that firm might change its mind about the adjustment it provided.

For that or another reason, a plan fiduciary might prefer getting the money from the plan-sponsor company.

The company might add to the mistakenly deposited amount an amount that follows a good-faith estimate of interest or the time value of money for the use of the money that did not belong to the company.

If the company and the plan fiduciaries are agreed on a correction, they might do one write-up to document the correction.

If there is a nonexempt prohibited transaction, a disqualified person, never the plan, owes the excise tax. So, the company might decide whether it files or omits an excise tax return.

This is not advice to anyone.

If the payment of the advisory fees may have resulted in fiduciary liability to the sponsor - perhaps because it was not reasonable for the plan to pay those expenses under the circumstances - then the plan sponsor may make a restorative payment to the plan. The restorative payment is not considered a contribution for purposes of 404, 415, etc. See Rev. Rul. 2002-45

In 2007, the Treasury department elevated the restorative-payment construct from nonrule guidance to a Treasury rule. And (adopting my comment) widened the circumstances in which the construct applies.

26 C.F.R. § 1.415(c)-1(b)(2)(ii)(C) https://www.ecfr.gov/current/title-26/part-1/section-1.415(c)-1#p-1.415(c)-1(b)(2)(ii)(C).

There need not be an actual or even threatened liability; it’s enough that there is a “reasonable risk of liability”.

Also, the restoration may be paid or provided by a person other than the fiduciary that arguably breached its responsibility.

Allocating a return of investment-advisory fees to the account or accounts the fees had been charged against should meet the rule’s condition that “participants who are similarly situated are treated similarly with respect to the [restorative] payments.”

This is not advice to anyone.