Jakyasar Posted June 18, 2020 Share Posted June 18, 2020 Hi Sponsor has a client who was supposed to pay directly to the sponsor's business fees in stocks. Instead of the monies going to the sponsor's business, they deposited 1000 shares of the stock to each plan and the price of the stock at that time was $50. All happened in 2018. In the DB plan, client sold 500 shares and made a long term gain of $5,000 and never withdrew the money (as far as I know, no taxes were paid for the gain). Remaining 500 shares were later taken out of the DB plan and transferred to sponsor's business account (no cash transaction but I believe the value at the time of transfer was less than $50/share). All in happened in 2018. In the 401k plan, similar situation happened i.e. transferred 900 shares back to the business (not sure if the stock price was over/under $50) and sold the remaining100 shares in the plan but at a loss of $5,000 and never withdrew the money. I never had to deal with this and what is the corrective steps to take? Never a dull moment, best not to check statements! Thank you, Link to comment Share on other sites More sharing options...
Alonzo Church Posted June 19, 2020 Share Posted June 19, 2020 There are some facts missing: 1. Did the client make the deposit into the 401(k)/pension, or did the plan sponsor do it? 2. Did the client include the deposit as part of its IRC 404 deduction for the year? 3. How quickly were the funds withdrawn? 1 year? 6 months? A few days?` 4. In the case of the 401(k) plan, was the stock allocated to participants accounts? How was the loss handled? There are a whole range of answers possible, which are fact specific. The return of funds to the employer is going to cause you more trouble than the initial mistaken contribution. unless that return was made very quickly after the initial error and, somehow, this can be considered the return of a "mistake in fact" contribution. I assume this plan is under the threshold for an ERISA audit, as this issue should have been picked up in an audit. It sounds like you need legal counsel to breathe on this. Link to comment Share on other sites More sharing options...
Jakyasar Posted June 19, 2020 Author Share Posted June 19, 2020 Thank you for your input. Here are some responses Let me clarify that the "client" is the client of the plan sponsor and has nothing to do with the 1. Client deposited directly into the plan (no clue they were able to do it as not the trustee or plan sponsor). plan sponsor found out later that these stocks were deposited directly into the pension plans. 2. No, the plan sponsor made the appropriate contributions and never used the stocks as part of contributions/deductions 3. The withdrawals were made within 6 months of the deposits all in the same plan year 4. No, it was only the in owners account, none of the other participants were affected by it, only the owner (all participants have their own separate accounts. This was not a contribution by the plan sponsor (the plan sponsor knows not to contribute anything other than cash). The plan sponsor did not deposit these stocks, their client did. Their client somehow was able to transfer the stocks into the pension accounts and nobody caught this until it was too late, how it was done without the trustee's knowledge is still a mystery. This is all I know. It was simply an error that should not have happened. Thank you Link to comment Share on other sites More sharing options...
Bird Posted June 19, 2020 Share Posted June 19, 2020 I'm not sure how to fix this. I'll go a long way to help someone who innocently makes a mistake, and maybe give them some options to "slide by" and take chances...but not here. This is mind-boggling. Do you have any idea how hard it is to transfer stock from one registered entity to another?! How f-ing stupid can people be? I see your answer "Their client somehow was able to transfer the stocks into the pension accounts and nobody caught this until it was too late, how it was done without the trustee's knowledge is still a mystery." I seriously don't believe the client of the sponsor could do that without the sponsor's knowledge, and the fact that there are two plans makes it all the more suspicious/stupid. I know this is of no help but... Also how is it found in 2020 when it happened in 2018? Ed Snyder Link to comment Share on other sites More sharing options...
ESOP Guy Posted June 19, 2020 Share Posted June 19, 2020 Are you saying one of the plan sponsor's customers actually managed to deposit stock into the qualified plans of the plan sponsor? If so, how did that happen? I don't mean in terms of blame but it would seem like a stock broker/investment person had to help and made a mistake in the transfer paperwork If so, what responsibility do they have- if any? I am still just trying to figure out the basic facts on this one. Link to comment Share on other sites More sharing options...
Alonzo Church Posted June 19, 2020 Share Posted June 19, 2020 I am convinced you have a situation that you can't just self-correct. There will be filings to the government involved. You need to talk to counsel. You can't solve this yourself. Your plan sponsor, for whatever reason, never took steps to fully correct the situation, raising additional red flags. You probably have prohibited transactions involving the pension and 401(k). These are subject to an excise tax and an excise tax filing. You have an additional factor with the stock only going to the owner in the 401k plan. Maybe that makes it easier to disgorge the assets without creating problems, but it raises plan qualification issues. Luke Bailey 1 Link to comment Share on other sites More sharing options...
david rigby Posted June 19, 2020 Share Posted June 19, 2020 Confusing to me is use of the word "client". (It's Friday and my brain is already shutting down.) Just a suggestion, but it might help if you avoid that word, instead using word(s) that are more instructive of the relationship to the plan, the sponsor, the participant(s), the trustee, etc. I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice. Link to comment Share on other sites More sharing options...
Mike Preston Posted June 19, 2020 Share Posted June 19, 2020 Why is this a difficult problem to solve? Give the net funds/stocks back to sponsor and call it a day. Luke Bailey 1 Link to comment Share on other sites More sharing options...
Jakyasar Posted June 19, 2020 Author Share Posted June 19, 2020 To all Thank you for your comments/suggestions. Mike, I am leaning towards your suggestion however, what will happen to the stock that was sold within the plan and had 5k of gains? David, I agree, will do for next time. Anyway, have a great weekend and be safe. Link to comment Share on other sites More sharing options...
Luke Bailey Posted June 19, 2020 Share Posted June 19, 2020 2 hours ago, Mike Preston said: Why is this a difficult problem to solve? Give the net funds/stocks back to sponsor and call it a day. Mike, these plans appear to be governed by ERISA and it's been over a year. How can you do that? Luke Bailey Senior Counsel Clark Hill PLC 214-651-4572 (O) | LBailey@clarkhill.com 2600 Dallas Parkway Suite 600 Frisco, TX 75034 Link to comment Share on other sites More sharing options...
Mike Preston Posted June 19, 2020 Share Posted June 19, 2020 33 minutes ago, Luke Bailey said: Mike, these plans appear to be governed by ERISA and it's been over a year. How can you do that? Because the deposit wasnt from the plan sponsor. How can u not? Bill Presson 1 Link to comment Share on other sites More sharing options...
shERPA Posted June 19, 2020 Share Posted June 19, 2020 IAWMP. Just get the funds out, document how the stock was deposited and trace the proceeds of the sale and put all that info in the plan file. It is money that doesn't belong to the plan, it is more like a banking error than anything else. Sometimes stuff happens, just fix it. Mike Preston and Bill Presson 2 I carry stuff uphill for others who get all the glory. Link to comment Share on other sites More sharing options...
Mike Preston Posted June 20, 2020 Share Posted June 20, 2020 5 hours ago, Luke Bailey said: Mike, these plans appear to be governed by ERISA and it's been over a year. How can you do that? I have no problem returning the money to the plan sponsor because it most likely was supposed to be paid from the client to the sponsor. However if it makes you feel better return the money to The entity that paid it in the first place. Accountants deal with this sort of crap everyday. Sorry, stuff. Link to comment Share on other sites More sharing options...
Jakyasar Posted June 20, 2020 Author Share Posted June 20, 2020 Thank you all and happy Father's day. Link to comment Share on other sites More sharing options...
Luke Bailey Posted June 21, 2020 Share Posted June 21, 2020 I think IAWMP as well. I did not read the OP as closely as I should have. Would of course need more detailed facts about why the error occurred, but sure, if a third party somehow deposited money into the trust, the right answer is probably that the third party should get the money back, with earnings, and give it to the right person (here, employer). Of course, we all agreed I think, that the facts as presented have elements of implausibility, so again would need to know had all relevant facts before reaching conclusion. Luke Bailey Senior Counsel Clark Hill PLC 214-651-4572 (O) | LBailey@clarkhill.com 2600 Dallas Parkway Suite 600 Frisco, TX 75034 Link to comment Share on other sites More sharing options...
Alonzo Church Posted June 22, 2020 Share Posted June 22, 2020 If you are going to disgorge the remaining funds and take a no harm, no foul approach, you should give the money back to the third party, not the plan sponsor. A payment from the fund to the plan sponsor will raise questions if there is any audit. (Either a CPA or a government agency). Luke Bailey 1 Link to comment Share on other sites More sharing options...
Luke Bailey Posted June 22, 2020 Share Posted June 22, 2020 Agreed. But then third party will immediately turn over to plan sponsor. But the form is important for reasons you stated, Alonzo Church. Luke Bailey Senior Counsel Clark Hill PLC 214-651-4572 (O) | LBailey@clarkhill.com 2600 Dallas Parkway Suite 600 Frisco, TX 75034 Link to comment Share on other sites More sharing options...
Jakyasar Posted June 22, 2020 Author Share Posted June 22, 2020 All good points and thank you Link to comment Share on other sites More sharing options...
Bird Posted June 23, 2020 Share Posted June 23, 2020 I'm not sure it's so easy. There's no doubt - or at least little doubt - in my mind that this was a scheme to avoid capital gains tax on appreciated securities. Just returning it in a "no harm no foul" transaction aids and abets tax evasion. I'm (still) not saying I know what to do about it. I'd at least want to talk to the accountants and see how they reported or proposed to report the various transactions. On 6/18/2020 at 6:59 PM, Jakyasar said: and sold the remaining 100 shares in the plan but at a loss of $5,000 and never withdrew the money. My math says that the loss per share was $50 - the (supposed) price of the stock when transferred. They were sold for $0? There are also potential issues with DB minimum funding if these weren't really assets but were included in the asset values. And presumably 5500s have been filed and need to be amended. Ed Snyder Link to comment Share on other sites More sharing options...
Luke Bailey Posted June 23, 2020 Share Posted June 23, 2020 Bird, you raise some really good points. Regarding the federal income tax issues, luckily 2018 is still an open year. I can only speak hypothetically, i.e., treating the facts as provided as a hypothetical, since we don't have "real" facts. But speaking hypothetically, I think there are probably two ways you could view this. In the first, the transfer of the shares would be treated as not having fulfilled the client's payment obligation. The capital gain would be the client's, and the client, after receiving the property and earnings back, would then fulfill it's payment obligation to the sponsor and the sponsor would have 2020 business income in the amount paid. In the second treatment, you would view the plan as the sponsor's agent, so the business income would be on an amended 2018 return of the sponsor, and the gain would be taxable to the plan sponsor. The latter is probably more complicated and perhaps further from the facts. It also raises potential PT issues. A mess to be sure. Completely agree with you regarding the actuarial impact for DB plan, but we of course don't really know the facts regarding that at all. Luke Bailey Senior Counsel Clark Hill PLC 214-651-4572 (O) | LBailey@clarkhill.com 2600 Dallas Parkway Suite 600 Frisco, TX 75034 Link to comment Share on other sites More sharing options...
Jakyasar Posted June 23, 2020 Author Share Posted June 23, 2020 No funding issue the plan sponsor deposited the contributions from their biz to the plan. these erroneous deposits were never part of the plan's contribution, required or deductible. As to Bird's question, sorry did not think the math carefully, assume $2,500 loss i.e. 50% of it. Luke, thank you for the additional thoughts. Link to comment Share on other sites More sharing options...
Bird Posted June 24, 2020 Share Posted June 24, 2020 16 hours ago, Jakyasar said: No funding issue the plan sponsor deposited the contributions from their biz to the plan. these erroneous deposits were never part of the plan's contribution, required or deductible. But were those assets included in the total value of assets when determining minimum/maximum contributions? Ed Snyder Link to comment Share on other sites More sharing options...
Jakyasar Posted June 24, 2020 Author Share Posted June 24, 2020 Trying to determine as this is a takeover for 2019. However, given the plan's funded status and the deductions taken, neither minimum nor the maximum will be affected. I may need to amend the filings/AFTAP/SB/PBGC, just to make sure that I have all corrected. Thank you for pointing out. Link to comment Share on other sites More sharing options...
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