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Deposit made before plan adopted


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Here is a new one for me.

Sent docs for 2021 plan year 5/31/2022 and they executed on 6/3/2022.

I now get a confirmation that they made the deposit on 5/23/2022.

So, what is wrong with this picture, if anything?

Am I being paranoid that they opened an account without a plan document and also without an executed plan document?

Thanks for comments.

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Without any research, I'd say that technically it is not a "valid" contribution to a qualified plan, and all the consequences that flow from that. In practical terms, I haven't ever encountered this, and I don't know if an IRS auditor would necessarily put the hammer down if the plan effective date was 1/1/21. 

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Can the sponsor be deemed to have transferred the funds from some "clearly not a plan account because there's no plan adopted yet", still-a-corporate-asset, account into a brand new "this is definitely a plan account pursuant to our new document" as of June 3?

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If there's no plan, then there's no real plan account.  So whatever they set up was probably technically still a corporate asset.  But then when the plan is executed, that account somehow "officially becomes" plan assets one way or another. 

(I might simply say the official deposit date was June 3 rather than May 23, because that's when the funds first became plan assets, piggybacking on the establishment of the plan.)

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Interesting thought but nor for me, we will have them take the money back and re deposit - possibly mistake of fact that the plan did not exist.

I do not think there is right way or correcting this but still good faith, at least in my humble opinion.

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Agree with Bri, no plan document = no qualified trust = still corporate asset. How/why a trustee/custodian would open a plan account without a copy of a signed document baffles me.

Establish the trust account now, and either transfer the previously deposited funds or withdraw from the "corporate" account and deposit into the trust, then close that prior account.

You can roll dice that IRS never sees this or even makes a case if it does, but why take that chance when there is an easy fix?

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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Just now, CuseFan said:

when there is an easy fix?

of course assuming the 2021 extended tax return due date has not passed and all can get fixed by 9/15, if that's your deadline.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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I can't help but laugh, I've just found I have a client who deposited their first CB amount 9/15 last year, but actually adopted their plan document 9/21 ahead of their 10/15 tax deadline.

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Jakyasar, where was the money deposited? Bank, mutual fund....Is the account in the plan's name or some other entity? Who is the trustee?

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Hi Luke

All good questions, do not know the answers yet. I just found out that the information yesterday.

I am assuming you are asking whatever was listed on the account and not the document.

If I may ask the reasoning of why you are asking these questions, very curious.

Thank you

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14 hours ago, Jakyasar said:

I am assuming you are asking whatever was listed on the account and not the document.

Right. Would affect the legal analysis/arguments.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Not yet available to me but I believe they will close the account and transfer the contribution to a new pension account with proper title/trustee.

Still not sure what to do with the earnings, if any.

Thank you

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On 8/23/2022 at 1:03 PM, CuseFan said:

Agree with Bri, no plan document = no qualified trust = still corporate asset. How/why a trustee/custodian would open a plan account without a copy of a signed document baffles me.

Because that's how it used to be.  Not only did you need to execute the document, you also had to establish the corpus of the trust, ie put money on deposit into the name of the plan.  And if you were up against the year end, constructive receipt put the document in your hands for execution as long as it was sent to you by the last day; but you couldn't backdate deposit records and mailing receipts so you were depositing monies ahead of the execution of the document.

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Some banking, insurance, and securities intermediaries scripted a rep to say that a retirement plan’s trust needed a little money so the trust would have a res (deliberately using lawyers’ Latin) and be established before December ended.

The suggested token amount would be something more than an initial fee (arguably disclosed in the account-opening paperwork the customer didn’t read). The firm would collect that fee, and an undecided customer might go ahead with the retirement plan, figuring he might as well get what he had paid for.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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14 hours ago, Nate S said:

but you couldn't backdate deposit records and mailing receipts so you were depositing monies ahead of the execution of the document

So depositing money by year-end attributable to a drafted plan document received by year-end was the justification (disguise?) for backdating the adoption thereof, interesting.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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2 hours ago, CuseFan said:

So depositing money by year-end attributable to a drafted plan document received by year-end was the justification (disguise?) for backdating the adoption thereof, interesting.

Did...not...say...that...

Your experience exceeds my own by a few years; merely using the days of paper-trading communication to suggest that the original transaction is not as wrong as someone used to email and fillable pdf's might think...

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I don't see why this would be a problem.  Same calendar year, same plan year, probably same tax year (unless sponsors tax year ends 5/31.

As long as the contribution was made for the right amount and no one was left out.

Like someone said above.  At the time of deposit it wasn't a plan account, but now it IS a plan account.

Could you MAYBE say that the value of the account on the day they executed the document was truly the contribution amount?  Sure.

But I doubt any IRS auditor would get upset at this, unless somehow the sponsor was trying to get some sort of unfair tax break.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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An update, per Luke's questions

Got the actual statement, has a plan name and trustee name on it. It is invested with a reputable brokerage house.

Not only they made 2021 contribution but they also prefunded 2022.

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So Jakyasar, you're talking here about a non-401(k) plan (no employee deferrals), and presumably the employer was on extension for its return, so they/you are using the ability under SECURE Act change to adopt a plan retroactively, right? I assume a noninstitutional trustee (e.g., the company owners), because most likely a bank or other institution would not have allowed opening the account in name of trust without document.

I would say:   (1) To some extent the issues posed are novel, since the SECURE Act change is new.

                       (2) Once they signed the plan documents, you certainly have a trust and I think you'd potentially run into more trouble if the trustee tried to take the money out now, and then put it back in.

                        (3) I guess the IRS could argue that the trustee owes taxes for the period from 5/23/2022 to 6/3/2022 (a little over a week), since the money was not in a qualified trust. But as long as the total allocations for 2021 don't exceed the 415 limit, don't see how you would have a qualification issue.

                        (4) In the small corporation setting, when issues like this have been dealt with on audit or determination letter process, sometimes lawyers will argue successfully to the IRS that since the individual who made the deposit was a 100% shareholder, or if all the directors were aware of and had approved the deposit in some way, the plan had been adopted. In theory the success of this approach depends on what the plan documents say. If you're lucky, (a) the plan document won't say that it is not adopted until signed, but rather will just say it needs to be "adopted," and (b) the corporate resolution that was provided will authorize the officers to "sign such documents as are deemed appropriate to carry out the purposes of these resolutions, etc."

                          (5) You could always put a memo in the file saying that you had talked to the employer and the appropriate body (board, sole proprietor/boss, partners) had considered the plan's adoption and decided to do it before the deposit was made, assuming those are the facts. Not saying that would be bullet-proof if this was $1 million and someone had it in for this employer (e.g., the business is about to go bankrupt and the employer is trying to put money our of a creditor's reach), but it could help, e.g. in an exam. The issue could certainly be spotted in an exam, because the IRS always checks dates of documents. But absent unusual circumstances this does not seem like the sort of thing an agent should be upset about, especially given that the SECURE Act provision is so new.

Sure, would have been better to sign the documents first. 

 

 

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Hi Luke

Thank you so much for your time.

It is a cash balance plan for a small sponsor (corporation). The owner is the trustee.

I still think it is risky and pushing them to redo the accounts prior to 9/15/2022 (minimum funding deadline). I may sound paranoid here but it is a lot of money to risk.

Yet another great discussion, thank you all.

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Jakyasar, maybe someone else will think differently or have more specific experience, but if the money was deposited into an account in the trust's name over which a trustee has signature authority, I would be careful. Don't know exactly what you have in mind by "redo."

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Sorry, too cryptic.

Will have them open another account and have the monies transferred for the old account to the new account and use the date of transfer as the contribution date.

I really am not sure what the correct course of action is as I am getting different views on what to do (from other platforms too) but from what I gathered, this course of action seems reasonable and in good faith.

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10 hours ago, Jakyasar said:

Sorry, too cryptic.

Will have them open another account and have the monies transferred for the old account to the new account and use the date of transfer as the contribution date.

I really am not sure what the correct course of action is as I am getting different views on what to do (from other platforms too) but from what I gathered, this course of action seems reasonable and in good faith.

I don't see what it accomplishes. You can't change the fact that it was deposited to a properly titled plan account in the first place. You might even be drawing attention to a (possible) problem if someone ever looked at the paper trail. I'm not sure it is in fact a problem but in no way does this actually fix it.

Ed Snyder

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