Utah Hospital Says Setting up 401(k) Was a Mistake

July 27, 2009 (PLANSPONSOR.com) - Kane County (Utah) Hospital employees whose 401(k) retirement plan accounts have been frozen by the Internal Revenue Service are threatening to sue the hospital.

The Salt Lake Tribune reports that in 1993, the hospital created a 401(k) to which employees contributed, but state law at the time required any retirement programs for government entities be established through Utah Retirement Systems, and employers, not workers were supposed to contribute to the fund.

Workers who have withdrawn from the 401(k) may have tax liabilities, and employees say they were cheated of contributions that should have been made by the hospital, according to the Tribune. Brian S. King, an attorney representing two employees, said the IRS froze the funds in 2007 while it determines whether there is any tax liability for employees.

King told the Tribune he has filed a notice of claim with the hospital in hopes that an agreement can be worked out to compensate workers who have been unable to invest in the current plan or draw out funds until the IRS makes a decision. He could not cite a dollar amount involved in the dispute, but said more than 80 employees who contributed to the plan could be affected .

If a settlement cannot be reached, King said he will ask a court to certify a class-action lawsuit against the hospital on behalf of its employees. He added that the hospital could have to pay what it owes workers for neglecting its fiduciary responsibility by not participating in the state program

Stephen J. Howells, the hospital’s chief financial officer, said the hospital will abide by whatever determination is reached by the IRS concerning the frozen accounts, but he hopes the agency recognizes a mistake was made and that it does not end up costing the hospital. “We know things now that we didn’t know then,” said Howells, according to the news report. He said it was too early to comment on negotiations concerning possible payments to employees.

The Tribune says a state law allows government entities to opt out of the state retirement system, and the hospital is looking at other options for a pension plan.