Leaderboard

An IRA can not be part of a qualified plan. A Roth IRA can not be rolled over into a Roth account in a qualified plan. Just set up the new account. Do it right.

Lay: The client would need to obtain the Fair Market Value (FMV) of the life insurance policy to determine the value, which may or may not be the Cash Value. It may be the $620,000 or some other value based on the year-end FMV combined with the other assets.

To David Rigby’s questions about what might lurk in the deal documents, someone might consider adding, for each might-be provision: Is the supposed provision merely a wishful statement? If a provision is somebody’s obligation, exactly which person, whether artificial or human, is obligated? Is the obligation consistent with, or contrary to, applicable law? Or relevant law? Even if not contrary to law, is the obligation legally enforceable? By which person? A? B? Some other person, whether artificial or human? This is not advice to anyone. And Santo Gold might wonder: Does my company have a current service agreement with A? Does my company have a current service agreement with B? Does my company desire to revise either service agreement, or both?

Peter's info (as he is clear to remind us, not advice) is thorough and excellent as always. It sounds like the client is happy with the current tax situation, and ejohnke is just looking to correct the potential disqualifying defect of allowing a distribution that shouldn't have happened. Is that accurate? If the individual could have had a distributable event, but the plan didn't allow the distribution, could the plan be retroactively amended to permit it? For example, the participant is 60 years old, so amend the plan retroactively to 2025 to permit in-service distributions at age 59-1/2. Problem solved. If there really is no possible distributable event (don't forget that employer money sources can have much more liberal distribution restrictions than 401(k) deferrals), then you might still be able to get relief for the distribution (and leave the money in the Roth IRA) through VCP.

A few thoughts (there are probably other relevant questions): Are the facts presented accurate? Are the facts presented complete? Did the buy-sell agreement contain any provisions relevant to the future of the plan? Did the buy-sell agreement alter (or attempt to alter) any plan provision of the A plan? Does A still exist or is it a wholly owned subsidiary of B? What does the A plan say about a distributable event? Does anyone in authority at B know what's going on? Has legal counsel for B made any statements about this?

Stock sale or asset sale? If asset sale: A still exists as a shell company and the owner(s) of A can sign on behalf of A. The participants can take distributions right after the sale date since they are no longer employees of A. If stock sale: B is now the sponsor of The Company A 401(k) Plan and has the authority to sign. Participants can not take a distribution until the plan termination date. Termination triggers the successor plan rule and B may not be allowed to maintain a 401(k) plan for 1 year after the distribution date. This is why, with a stock sale, it is important to terminate the seller's plan before the sale date, or be prepared to merge the plans.

The person that ought to have been responsible to pay, or reimburse payment of, a penalty—whether an ERISA title I penalty, or a tax law penalty—restores to the plan the money the plan was not responsible to pay, with interest or another measure of the time or investment value of the money. And, if the person that ought to have been responsible obtained a gain by having the use of what in conscience was the plan’s money, the person disgorges not only the money had but also its gain and pays it over to the plan. The “interest” portion of the plan’s recovery is the greater of the time or investment value of the money or the other person’s gain by having the use of what in conscience was the plan’s money. Equitable remedies run to the plan that was deprived of what in conscience was the plan’s money, other property, and rights. Restoration or disgorgement does not come from the plan. These remedies come from the person that had the money that ought to have been in the plan, and go to the plan to be made whole. This is not advice to anyone.

Usually, I would not add anything to the responses of the wise folks on this thread but I have to commend the OP for questioning the response they received from "AI". While AI may give one a starting point, AI responses can be flat out wrong so, in my view, AI responses should always be viewed extremely critically. I fully agree with @Peter Gulia and @austin3515. I would like to add a couple of thoughts. OP notes that their initial query is in response to IRS Notice CP1348. The IRS's purview does not cover the entire universe of whether plan amounts can be used to pay penalties. So what occurs in an IRS Notice regarding prohibited transactions may not be the end of the story. Their purview only covers whether there is a prohibited transaction under 4975 and the consequences under the tax code. @austin3515 and, ultimately, @Peter Gulia look at the entire universe in bringing up the views of the DOL under ERISA. Also note that the concept of "plan assets" is an ERISA concept monitored by the DOL. In my experience, under ERISA, civil penalties assessed against fiduciaries, plan sponsors, or other parties for some sort of legal violations or prohibited transaction cannot be paid using plan assets. Plan assets must be used exclusively to provide benefits to participants and beneficiaries and to defray "reasonable administrative expenses." I have not researched this recently but my understanding is the DOL maintains that paying penalties from plan assets is not a reasonable expense and is strictly prohibited. DOL has stated that penalties under ERISA 502(i) must be paid by the party in interest involved in the transaction not the plan, and using plan assets to pay penalties is likely a breach of fiduciary duty. Also, regarding restoration or disgorgement as @Peter Gulia brings up, I have colleagues who distinguish between restoration/disgorgement, which are remedial in nature, as opposed to penalties, which are punitive in nature. They seem to imply that plan assets could be used for restoration or disgorgement but I must be thick-headed because I don't see it. How can you use plan assets to restore something to the plan? disgorge from plan? There may be circumstances that I am just not thinking of but it seems like a zero sum game.

Where did he make the deposits? What type of an account? Any other employees? Based on your prior answers, I don't see any reasonable path forward. When you run into stuff like that, do you really want to get involved with a potential client with such a low business acumen? I means seriously, how could he think they would be deductible?

I would think twice (thrice) before taking this assignment. The facts presented do not bode well for a good consultant/client relationship.

The Labor department’s Voluntary Fiduciary Correction Program, at its § 7.6(b), suggests, indirectly, an opportunity to correct a fiduciary’s breach in paying, or allowing to be paid, from plan assets an expense that was not a proper plan-administration expense. While there are some further conditions and details, the correction is mostly about restoration or disgorgement, whichever is the greater recovery for the plan. https://www.govinfo.gov/content/pkg/FR-2025-01-15/pdf/2025-00327.pdf A VFCP no-action letter affords some relief from some ERISA title I civil investigation and civil penalties. I don’t know what might obtain tax law relief. This is not advice to anyone.

Peter is being very non-alarmist (even though he is of course correct!). I would like to be much more alarming. Fix this immediately, it is super-duper bad. The Plan Administrator made a mistake; that's the plan administrator's fault and they need to pay the expense. At best you can take the position that this is a prohibited loan from the plan to the plan administrator, corrected with interest (etc). Get an attorney involved. This is very very problematic. probably eligible for self-correction under the new DOL Program, but absolutely needs to be corrected.

In my view (which is not advice to anyone), a fiduciary ought not to direct paying or reimbursing from plan assets such a penalty if a fiduciary, a service provider, or an employer is responsible for the act or failure to act that results in the penalty. That’s so even if a penalty was administratively addressed to the plan. If an employer paid a penalty but another person was at fault, the employer might get its lawyer’s advice about rights and remedies regarding the other person.

What rule/mechanism can you cite for a retroactive opt-out? I honestly don't care about what the participant wants. This is a plan issue, you correct and move on. Do not make the situation worse by trying to do what they "want" instead of just doing what is right.