A client paid a lump sum from a DB plan to a 25 highest paid employee when the funding ratio was not suffcient to allow this. Getting the distribution back will not be easy - employee left on bad terms.

Is there anything the company can do to force the employee to return the money? Anything in the employee's interest that would make him want to return the money?

I assume we have to go to the IRS - is this CAP, VCR - which one?

The 5500 is due - does this get reported anywhere? Is there an excise tax payable now or do we wait to talk to the IRS?

I called the EFAST hotline and got connected to the DOL - the guy I talked to said it was reportable on the 5500 but would not tell me where -

Responses of various service providers after taking the DOL representative training course 2:

Mechanic - "This additive will help your engine run better, but I can’t tell you which fluid it is used with."

Physician - "Here’s your prescription, but unfortunately I can’t tell you the appropriate dosage."

Lawyer - "If you don’t structure that transaction properly, you’ll be thrown in jail. Good luck!"

Actuary - "You must complete your funding by September 15th, but I can’t tell you the required contribution amount."

WDIK - "I have no idea, let's post on the Benefits Link Boards."


(Course 1)

The plan administrator and/or trustee would expect personal liability if any NHCE participant was not able to receive their full benefit due to underfunding.

Are there mitigating circumstances why the person was fully paid? Was there a threat of lawsuit, counter-claims on business practices or other business issues that bring up any dirty laundry? This may be the story behind your story. If it was simply an oversight, then consider whether to file for CAP.

Also, I don't find the spot to report this particular distribution in my 5500 instructions either.

I see that you have 2 issues here. First, a discrimination issue has arisen if the plan were to terminate and NHCE's get less than their full benefit. Second, the terms of the plan document were not followed as the restriction of paying the top 25 paid HCE's is in the document.

I don't know the specific correction for this occurrence without research, but I would suggest you first read Rev. Proc. 2003-44 to read about how to correct the failure to follow the document. My guess is that the eventual correction will come one of two ways. First, either the participant will pay back the funds (fat chance) or second, the plan sponsor will have to satisfy one of the methods the participant would have had to to lift the restrictions. In other words, the plan sponsor would purchase a bond or provide the appropriate security.

As for this going on the 5500, you don't need the DOL to answer that question. Just go through the form. I can't think of any place where the situation would be reported.

Was the person a top 25 HCE or just top 25 paid??? Makes a difference!

Interesting question on the bonding:
Assume the plan sponsor cannot recover the over-payment and elects to provide a bond to plan. The bond end up being called by an early termination of the plan with insufficient assets. The plan sponsor puts up the funds. Is it deductible?

I grant that this is a little off the track, but I just wonder....

There is one thing that you can do to add some leverage on the person who received the inordinately large payment.

Tell the recipient that, unless he or she repays the excess potion, the 1099 that you will issue to him or her will indicate that not all of the payment was eligible for rollover treatment. That 1099 would probably trigger an automatic IRS audit, assuming that the person rolled over the entire distribution.

If that is true, unless that person is so masochistic that he or she likes to get into fights with the IRS where he or she will automatically lose, this should be enough to make him or her volulntarily repay the excess amount.

To put the squeeze on the person even more, you can say that you will issue the 1099 in a very short time frame (e.g., one week) unless you receive the money by then.

Also, I recommend that you demand that the person repay the excess amount plus interest.

There's nothing like having an 800 pound gorilla (i.e., the IRS) backing you up to help you win disputes.

"I'm from the IRS and I'm here to help you."

Before notifying the participant that the 1099 will be revised consider the following:

1. The change in the payment on the 1099 will not necessarily prevent favorable taxation of the distribution actually paid to the participant from a qualified plan. The IRS could accept the participant's position that the distribution meets the requirements for a rollover under IRC 402(a) and that the question of whether the employee must return part of it is a civil matter between the plan and the employee which does not affect the eligibliity of the distribution for rollover treatment under the IRC. A response by the participant to the IRS could trigger an audit of the plan (see 3).

2. Revising the 1099 would give the participant a colorable claim for discrimination under ERISA 510 (whether or not he would prevail in ct) which would allow his attorney to get discovery on all documents and correspondence relating to the plan including the calculations used to determine whether there is a restriction on a lump sum payout under the plan and whether participants who received excess payouts in the past have been allowed to to keep them as well as issues affecting the plan's qualfied status. The last thing any employer wants to do is turn over personnel and confidential correspondence to a litigant.

3. It is not in the clients interest to provide information to the IRS that a plan has engaged in a disqualifying action regardless of how remote the actual risk of disqualification is.