Can 4 Yr. Old Plan w/o a Doc Get Compliance Thru EPCRS?

[mming]

PS plan set up for small business owner by investment firm that never drafts a document or adoption agreement for it. Unsuspecting client never had TPA as he was led to believe investment firm will do it all. Contributions were made annually and deducted. 5500's have never been filed. Accounting is apparently OK as the sole employee has always had proper amts allocated to him. Total plan assets are only about $50,000.

How can the plan now become qualified? Can the plan undergo voluntary compliance with the IRS w/o an FDL or an opinion letter? If so, how much of a sanction/fee would the IRS charge and how much would the client expect to pay a TPA to handle this (or would they need an atty.?)? Also, if this is done, would 5500's for all past years have to be submitted? What other options can be considered? All help appreciated.

[jpod]

Based on the facts presented, it sounds like there is no "plan." So, it is impossible to correct through EPCRS or otherwise; employer's tax deductions for "contributions" are probably at risk, but more facts are needed to determine whether deductions are at risk OR plan participants owe back taxes for past years' "contributions."

Good news is no 5500s were required (probably).

While the employer should seek ERISA/tax counsel, it should also find a good professional malpractice plaintiff's lawyer.

[Guest stryan]

I would concur with Jpod. Absent a formal adoption of a qualified plan and a written plan document, there is no plan. Looks like it is time to settle up with the tax man.

[Blinky the 3-eyed Fish]

I think if the client looks really hard, way back in the corner, maybe, or under some papers on his desk he will find that signed plan document.

[jpod]

Blinky:

Are you suggesting (1) the client has not looked hard enough; or (2) something else.

There are people who did time as guests of Uncle Sam for implementing suggestion (2).

[Blinky the 3-eyed Fish]

Of course I am suggesting option 1 and do not have the faintest idea what option 2 could be.

[Mike Preston]

I'mgoing to go with Blinky on this one. I'd present it to the folks at EPCRS on its face and see if they will allow it. Something tells me that in this case it isn't that long of a shot. Maybe even a letter from the client to the investment firm laying out the basics of the engagement would do. That would be a better document than a napkin, wouldn't it?

[mbozek]

Why not recharacterize the deferrals as made to a nonqualified plan and amend the tax returns for the open years since there is only an aggregate of $50,000. It seems that this will be the result if the IRS refuses to retroactively approve the adoption of the plan (as is likely since it violates all existing precedents) and the client will not have to incur extensive legal fees to prepare the case for the IRS. Maybe the investment bank has some liability to hold the client harmless if it can be proven that the bank was going to take care of providing the plan document but failed to do so. Your client needs to cousult counsel to review the options and liability issues. Also penalities for failiure to file 5500 may exceed the taxes due so there is no reason to file as qualified plan now since it would be cheaper to pay back taxes and interest.

Other option is to freeze plan and adopt a qualified plan effective for 2002 (client could adopt a SEP plan for 2001 if tax return has not yet been filed) and take audit risk for future years which will be quite slim considering that IRS does not know that plan exists. However, tax reporting problem would arise when participant requests distribution from old plan.