Doc Update

[David]

We have a new client that has both a MP plan and a PS plan which he wants terminated. The plans have been around over 10 years and he has always been the only participant. The last document updates were for TRA86. After explaining that the IRS requires plans to be current with the laws in effect at the time of termination, he said he thought that seemed silly and thought he might risk not having the plans updated and simply would have a termination amendment.

I have to say that of all the many times I've had this discussion with clients, this is the first one that's balked. Theoretically, what could happen upon audit? Practically, I would hope the IRS would let you correct the problem, but I don't know if or how much financial penalty there would be.

Any help on the potential penalties would be appreciated. Thanks.

[Guest pineapple]

You say he might not have the plans updated, but just do a termination amendment. Do you mean that he won't amend at all for GUST, or that he will amend for GUST but not submit the plan to the IRS for term approval?

[david rigby]

My perspective has a different emphasis. If the plan sponsor does not want to bring his plan into compliance, I would advise him to get proper legal advice, and I would probably include my (non-legal advice) opinion that his course of action may not be wise. His attorney and/or auditor might be able to guide him in the best course of action, and let him know what are the consequences of taking different action.

[Guest pineapple]

Regardless of the specifics, I would definitely advise the client to follow the proper procedures (i.e., restate for GUST, submit for term approval, etc.). Since the owner is the only participant in the plans, the IRS would be more willing to disqualify the plans if they were to discover defects on audit. (When plans benefit NHCEs also, the IRS is usually less prone to lean towards disqualification.) Disqualification would mean loss of deductions in prior years, inclusion in income for contributions, etc.

If the IRS allowed the client to correct the defects under EPCRS, the sanctions would be higher than the costs associated with restating/submitting now. Then again, some clients just like to gamble.

[Lynn Campbell]

If this client is new to you and not accepting your advice, I would suggest you decide not to accept him as a client. He sounds like the type who will always second-guess you and not what you are looking for...