Payment of DB Plan Benefits out of Corporate Assets (wrong account)

A client acquired a small DB plan a few years back (around $1M in assets) in connection with acquisition of the sponsor entity.  The plan appears to well over 100 percent funded and the only participants in the plan are terminated and retired employees.

The company would like to terminate the plan but the problem is we recently discovered that since the client's acquisition of the plan, payment of benefits under the plan (affecting all participants) have been made from the corporation's general assets instead of from the plan assets. 

This is obviously in violation of the terms of the plan but our question is what correction needs to be made if any?  The client does NOT want to recover the amounts that were mistakenly paid out of corporate assets, so any correction would be for compliance purposes to ensure the plan can be properly terminated and there is no penalty to the participants that were paid out of the wrong account. 

Would appreciate insight from anyone who has dealt with a similar situation. Was unable to find anything on point in the IRS correction procedures

This brings up more questions - HOW were those assets paid from general assets, taxes withheld, distributions reported, etc.? 

Was that all done properly such that the company was merely functioning as the paying agent for the plan? I've seen that before - not a best practice for sure - but the required funds left the plan and flowed through the company's checking account with the proper tax withholding and reporting.

Why would they not want to recover those assets? Wonder if not doing so would constitute contributions to the plan and if so, would that create any issues?

You don't say how long this has been going on - what is "a few years back"? If this has been 2 or 3 years then I'd be inclined to reimburse the company from the plan, whether they want or not, and move on. If this has been going on longer, then maybe a VCP. Or reimburse for recent (or open) years only and move forward. Or, actually spend some money and do the right thing and get a bank to function as paying agent.

What was going on with all this before the acquisition? Did the seller act as plan paying agent as well?

Finally, how has the company reconciled all this on their books, and did they take corporate deductions for plan benefit distributions?

Sorry, more questions than answers.

35 minutes ago, CuseFan said:

Why would they not want to recover those assets? Wonder if not doing so would constitute contributions to the plan

I'd think so, at least effectively.  

37 minutes ago, CuseFan said:

Finally, how has the company reconciled all this on their books, and did they take corporate deductions for plan benefit distributions?

Probably something else but as above, they are effectively contributions.

This should be fixed by returning money to the corp, whether or not with IRS approval.  Amusing that they don't want to be reimbursed.  How does one wipe out the obligations without showing a distribution?!  Fascinating what some people can do to screw things up; I mean you really do have to try very hard to do something so very wrong.

1 minute ago, Bird said:

Fascinating what some people can do to screw things up; I mean you really do have to try very hard to do something so very wrong.

I can't fathom the person authorizing or writing the corporate check actually thinking they're doing the right thing.

Corporate accounting must be lax to non-existent for this to occur for several years.  The paying agent approach might be the best way to resolve it, or treating as contributions to the plan.  Each has its pros and cons and implications for the corporate tax returns as well as correcting the plan.  At a minimum, any correction that involves plan money going to the corp should involve ERISA counsel. 

Where was the original actuary in all this, preparing required reports with what was going on ?

Good point - were people accounted for as in pay status or paid out lump sums? And how could that be recorded w/o assets actually leaving the plan?

On 2/25/2021 at 1:31 PM, CuseFan said:

This brings up more questions - HOW were those assets paid from general assets, taxes withheld, distributions reported, etc.? 

Was that all done properly such that the company was merely functioning as the paying agent for the plan? I've seen that before - not a best practice for sure - but the required funds left the plan and flowed through the company's checking account with the proper tax withholding and reporting.

Why would they not want to recover those assets? Wonder if not doing so would constitute contributions to the plan and if so, would that create any issues?

You don't say how long this has been going on - what is "a few years back"? If this has been 2 or 3 years then I'd be inclined to reimburse the company from the plan, whether they want or not, and move on. If this has been going on longer, then maybe a VCP. Or reimburse for recent (or open) years only and move forward. Or, actually spend some money and do the right thing and get a bank to function as paying agent.

What was going on with all this before the acquisition? Did the seller act as plan paying agent as well?

Finally, how has the company reconciled all this on their books, and did they take corporate deductions for plan benefit distributions?

Sorry, more questions than answers.

I'm not sure of the ERISA implications, but for accounting purposes these payments would be contributions to the plan.