Jump to content

Stock Trades in 403(b)(7) Account- corrective action required?


Guest Shelton
 Share

Recommended Posts

Guest Shelton

What is the corrective action that should be taken if stocks (or any other investment other than domestic mutual funds or other regulated investment companies) are invested in a 4039b)(7) account?

Is the 403(B)(7) account disqualified?

Thanks for your help

Shelton

Link to comment
Share on other sites

Yes, the contract can lose 403(B) status. You might consider one of the IRS correction programs if this has been going on long enough so that there is potential back tax liability.

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

Link to comment
Share on other sites

Guest Shelton

Thanks for your responses.

Carol, I was reviewing the correction programs and could not find any that addresses this type or error.

As the custodian of the 403(B)(7), am I required to make this correction? Or should the onus be on the client (account owner) to determine the appropriate correction program and provide me with instructions on what they want to have done?

Thanks

Shelton

Link to comment
Share on other sites

Since the custodian is required under the terms of the custodial agreement to invest in mutual funds and not stock, the custodian should reverse the trades without waiting for instructions. Custodian should consult with a tax advisor to determine what is the proper tax reporting. Perhaps the resolution of how to fix the problem can be posited as the answer to the philosophical question of " If a tree falls in the forrest and no one hears it...."

mjb

Link to comment
Share on other sites

If "new" money/contributions went directly into impermissible investments, this would be fundamentally inconsistent with the 403(B) requirements. Therefore, I would apply the rules in EPCRS applicable to "ineligible employer" situations, by analogy.

If, on the other hand, this was a case of "old and cold" money that had been in permissible investments for a while being transferred into impermissible investments for a period of time, it seems to me that a less drastic correction method would be acceptable.

Link to comment
Share on other sites

It is good to know that the IRS believes that the only consequence of investing in stock is that the contributions (not earnings) for the year are included as taxable income because the contract is not an annuity for that year. Therefore the only penalty to the employer is for income tax and fica tax withholding, if any. I don't know how the employer will be able to contact the IRS about the problem because many employers do not get copies of what are the investments used by employees in a 403(B) plan since the account relationship is between the broker and the employee.

mjb

Link to comment
Share on other sites

  • 4 weeks later...

Shelton: Must reverse the stock trades and convert proceeds to money market fund. Question is tax liability. Trades made in 2002 can be reversed as a recission in same tax year- Prior years stock purchases may result in all contributions for such year being considered taxable income subject to income tax but employer will have to issue revised w-2 for such year. Gain in excess of contribuion will be considered part of an annuity contract under IRC 72. s/l will prevent income tax to employee for contributions more than 3 or 6yrs old. Employer could be liable for failure to withhold tax although there may not be any penalty for understatement. Amounts treated as ineligible contributions will be after tax amount in 403(B) plan. Need to get tax advisor to review proper course of action/options for each of the parties, eg., employer, custodian, etc.

mjb

Link to comment
Share on other sites

Guest dietpepsi

I spoke to the IRS about a potential client with this problem. I said I didn't think the plan sponsor would be willing to file TVC since the plan sponsor had no control over the participants trading. The IRS said only the plan sponsor can file the TVC, not the participant or the custodian. Just FYI.

Link to comment
Share on other sites

Diet: This is consistent with my experience. The plan sponsors haven't a clue as to what is going on in the participant's accounts and regard it as a brokerage problem. Therefore its up to the broker to fix it. The employer who files a TVC has to pay for the cost of fixing someone elses' problem- either the broker or the employee.

mjb

Link to comment
Share on other sites

  • 9 years later...
  • 2 weeks later...
Piggybacking off this old post, and wondering in there is anything new and/or definitive

What is the corrective procedure if Stock are Trades in 403(b)(7) Account?

Thanks

sell the stock. Amount contributed to purchase stock is regarded as after tax contribution.

mjb

Link to comment
Share on other sites

  • 4 weeks later...
Piggybacking off this old post, and wondering in there is anything new and/or definitive

What is the corrective procedure if Stock are Trades in 403(b)(7) Account?

Thanks

sell the stock. Amount contributed to purchase stock is regarded as after tax contribution.

Is VCP an option also? Apparently this problem is more common than one would think.

PensionPro, CPC, TGPC

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...