Just received a call from a plan sponsor. It seems that the 100% owner of this LLC has deposited funds as salary deferrals for himself in 2006, 2007 and 2008. He now wants all of those deposits refunded before October 15 because they were supposed to be deposited to his SEP, not the 401(k) plan. It sounds fishy to me.

Anyone care to share thoughts about what sort of documentation we should request of the employer before processing a refund?

Who is the trustee for the plan? As TPA, I would follow the explicit instruction of the Trustee for the plan. As trustee, I would say heck no!

Should keep good documentation, explicit instruction from the plan's Trustee & maybe even a hold harmless agreement.

I'd be very careful, especially since the Trustee is probably the 100% owner who's asking for the transfer to the SEP. If the funds go into the SEP, he then can take a distribution without a 401(k) distributable event--and he's asking for 3 years' worth of $$ to be transferred. On what basis can the returns occur? Mistake of fact? Certainly not contributions for 3 years--there's an ERISA 12 month limit on mistake of fact returns. (Is it just coincidence that individual tax return extended due date is 10/15?)

I'm not answering your question re: proper documentation, because I don't understand the legal basis for the return. Without that, I don't think you can return the $$. I would suggest that you are a fiduciary to the extent you have the authority to decide whether this refund occurs, and if you don't want to be a fiduciary--so that your action can't be a potential fiducary breach--then don't think & just return the $$ as requested. (I'm not recommending that course of action, but just telling you that you may face fiduciary liability if you act with any discretion whatsoever with regard to the return of these $$. You may want to look at the plan document, and your own service agreement (if any), to see if that helps you decide whether you must/should/cannot use any discretion in this matter.)

The trustee is indeed the 100% owner. He is totally ignorant of the subject -- wasn't even able to tell me if he received a W-2 or not without consulting his CPA. The CPA is who is supposedly pushing for distribution, although I'm hearing all of this through the business owner's bookkeeper who says she is responsible for erroneously depositing the funds to the wrong account. We have on file a deferral election for a dollar amount that is different than any of the annual totals that has ever been deposited. Two of the three deposits they want back were made within the last 12 months. We have already concluded that the one from 2006 must stay in the plan, although it could, perhaps, be forfeited.

I forgot to mention earlier that this is a safe harbor matching plan and they deposited safe harbor match for everyone EXCEPT the owner in 2006 and 2007. The 2008 has not yet been calculated for anyone. The document calls for the match to be made for all participants.

As TPA we have two goals -- to avoid becoming a fiduciary and to avoid any subsequent liability for failing to tell the trustee he might be doing something he shouldn't. Clearly there is some sort of error here. I guess the question is how to keep them out of trouble without becoming a fiduciary.

So, there's a safe harbor 401(k) and an SEP? Did other employees receive employer contributions/deposits into the SEP for those years? (I'm just wondering if both of these plans are available to all appropriate eligible employees.)

I would think, at a minimum, in addition to retaining the 2006 deferrals, that you should retain any portion of the "deferrals" for 2007 & 2008 which correspond to the deferral election forms on file for the owner. If you believe there was a mistake of fact as to the remaining amounts, then, by all means, allow those $$ to be transferred to the SEP--employers with multiple plans often make the wrong contributions to the wrong plans, and transfers between plans occur later. (Any impact on the 401(k)'s past 5500s?)

Certainly you want to give the Trustee/Administrator the proper advice. Some on this board may think my earlier suggestion that your limited discretion may cause you to be, on a limited basis, a fiduciary with respect to that decision. But, the bottom line is that you are what you are--and, by making the right decision you will limit (or eliminate) any potential fiduciary liability that an aggressive liitigator might want to assert.

Until last week we did not know there was a SEP and we have no information about who did or didnot receive contributions in any given year. We're wondering also, but we don't intend to ask.

The deferral election is dated 2005 and shows $18,000 which matches the 2005 402(g) limit plus catch up. We don't know if there is a later election revoking this one. There was no 2005 deposit. The 2006 deposit was a lesser amount. The 2007 was $20,500 and the first 2008 deposit was an odd amount that doesn't appear to tie to anything.

The 5500s are prepared on a cash basis, so presumably any correction will impact only the current year.

I'm leaning toward sending the employer a letter describing the circumstances in which he would be permitted to make a withdrawal, pointing out the discrepancy in the safe harbor match for the years in question, and reminding him that a withdrawal without a distributable event AND failing to follow the plan terms when allocating the SH match are both potentially disqualifying events.

Seems like there's no mistake if the 2007 deposit to the 401(k) was $20,500 (but was it really a deferral?). Just coincidence ($20,500)? I think not. The fact that there was no SH match is not critical, because it is not required to be given to HCEs--so, he may not have been entitled to the SH match (you may want to check the document to see). I think your approach is the correct one--this doesn't smell right.

The document requires all participants to receive the SH match.