Foregoing GUST restatement for terminating plans -- what are the sanct

[Guest Robin Vatalaro]

I have two clients whose 401(k) plans terminated in 2001. Neither want to pay fees to have the plan document brought into compliance with GUST. Obviously the plans need to be amended, but what are the potential sanctions upon audit for not having udpated? Again, I don't agree w/ this approach, but I think both clients are weighing the cost benefit of the situation. Any advice appreciated.

[IRC401]

If a plan document isn't in compliance with current law when it is terminated, the IRS can disqaulify the plan (and disallow all of those rollovers to IRAs among other things).

[imchipbrown]

Can't you have them sign an off-the-shelf prototype (say from Schwab, etc)? Even a plain PS effective on the termination date?

[Guest Robin Vatalaro]

Both of these clients are using pre-GUST prototypes. So yes, I could have them sign a new prototype. But I would charge to process the prototype on their behalf (box checking, board resolution, delivery to the client for sig, etc). These two clients don't want to pay anything at all. But, I appreciate the suggestion!

[actuarysmith]

The obvious answer is that the service could disqualify the plan. Then it becomes and issue of all deductions being disallowed and all benefits immediately taxable to participants.

The client must ascertain the chances of being audited against the fees you charge and the amount of tax-deductible money at stake in the plan.

I would definitely make your client sign a hold harmless agreement. This would state that you had advised them they should restate and they chose not to.

These are exactly the kind of clients that will bite you in the butt.......... If they are ever audited, they would probably try and bring you into the whole mess and suggest to the IRS that you did not force them to restate.

[Richard Anderson]

My understanding is that if a plan document is not in compliance with current law when terminated, then that plan is not a qualified plan. This is true whether the IRS finds out about it or not.

If the above is true, then I have a question. If Robin's clients refuse to bring the document into compliance; can or should Robin's firm help the client with the termination process? Help such as distribution election forms to rollover to an IRA? Robin's firm would be helping to rollover to an IRA (or possibly to a qualified plan) assets from a plan that is not qualified.

A similar situation has occurred at our firm, and we have differing opinions about whether it is OK, as professional advisors, to help the client with the distribution of assets from the plan.

Any opinions would be appreciated.

[actuarysmith]

I don't want my previous post to be misunderstood. Our firm clearly advises our clients that GUST restatements are mandatory. It does not matter whether or not the plan is terminating. However, we will sometimes come accross a client that is absolutely worked up over having to pay additional fees when they terminate. We inform them that the IRS requires that the document be changed, but if they instruct us in writing to NOT restate, and they sign a hold harmless agreement, then we will usually go ahead and process the distributions.

We make if clear that they are taking a big risk, and potentially putting all plan participants at risk as well.

I did not want to leave the impression we were suggesting to "roll the dice and take your chances with the IRS" or that we were advocating betting against the odds of being audited.

Many times the clients will go ahead with the restatement when we inform them that we will require them to sign a hold harmless agreement.

I guess we could easily get into a discussion of ethics and morals. should we tell clients that we will refuse to process distributions if they do not restate? Many clients will go ahead and make distributions without our help. They may try to apply the vesting schedule (even though the plan is terminating and everyone should be 100%), or they may screw up on withholding, etc .

Which is better?

[Alf]

It is better to not get involved in their distributions and reporting. I don't think they have a reporting position for 1099Rs if the plan is not qualified. Also, I think there may be a requirement to notify the receiving IRA custodians that distributions are not eligible rollover distributions.

[Lynn Campbell]

Robin - I would terminate my relationship with the client and send a letter explaining the reasons.