Stock Trades in 403(b)(7) Account- corrective action required?

[Guest Shelton]

What is the corrective action that should be taken if stocks (or any other investment other than domestic mutual funds or other regulated investment companies) are invested in a 4039b)(7) account?

Is the 403(B)(7) account disqualified?

Thanks for your help

Shelton

[mbozek]

Bust the trades asap and deposit the proceeds in a mm fund; also refund the cost of commissions. There is no answer on status- 403(B) accounts are subject to audit by IRS...answer may depend on reporting by custodian.

[Carol V. Calhoun]

Yes, the contract can lose 403(B) status. You might consider one of the IRS correction programs if this has been going on long enough so that there is potential back tax liability.

[Guest Shelton]

Thanks for your responses.

Carol, I was reviewing the correction programs and could not find any that addresses this type or error.

As the custodian of the 403(B)(7), am I required to make this correction? Or should the onus be on the client (account owner) to determine the appropriate correction program and provide me with instructions on what they want to have done?

Thanks

Shelton

[mbozek]

Since the custodian is required under the terms of the custodial agreement to invest in mutual funds and not stock, the custodian should reverse the trades without waiting for instructions. Custodian should consult with a tax advisor to determine what is the proper tax reporting. Perhaps the resolution of how to fix the problem can be posited as the answer to the philosophical question of " If a tree falls in the forrest and no one hears it...."

[jpod]

If "new" money/contributions went directly into impermissible investments, this would be fundamentally inconsistent with the 403(B) requirements. Therefore, I would apply the rules in EPCRS applicable to "ineligible employer" situations, by analogy.

If, on the other hand, this was a case of "old and cold" money that had been in permissible investments for a while being transferred into impermissible investments for a period of time, it seems to me that a less drastic correction method would be acceptable.

[mbozek]

It is good to know that the IRS believes that the only consequence of investing in stock is that the contributions (not earnings) for the year are included as taxable income because the contract is not an annuity for that year. Therefore the only penalty to the employer is for income tax and fica tax withholding, if any. I don't know how the employer will be able to contact the IRS about the problem because many employers do not get copies of what are the investments used by employees in a 403(B) plan since the account relationship is between the broker and the employee.

[joel]

Shelton,

Is this a salary reduction 403b or an erisa 403b? Is there an employer match?

[Guest Shelton]

There are multiple accounts affected- mostly non-ERISA. There are some with employer contributions (ERISA).

[mbozek]

When were the trades made into stock? 2002, 2001, earlier?

[Guest Shelton]

It varies from account to account.

Some were even transnferred in from another custodian.

[mbozek]

Shelton: Must reverse the stock trades and convert proceeds to money market fund. Question is tax liability. Trades made in 2002 can be reversed as a recission in same tax year- Prior years stock purchases may result in all contributions for such year being considered taxable income subject to income tax but employer will have to issue revised w-2 for such year. Gain in excess of contribuion will be considered part of an annuity contract under IRC 72. s/l will prevent income tax to employee for contributions more than 3 or 6yrs old. Employer could be liable for failure to withhold tax although there may not be any penalty for understatement. Amounts treated as ineligible contributions will be after tax amount in 403(B) plan. Need to get tax advisor to review proper course of action/options for each of the parties, eg., employer, custodian, etc.

[Guest Shelton]

Thanks- very much

[joel]

Shelton....just to be sure...was the 403b first rolled over to an IRA or were the stock trades done inside of the 403b?

[Guest dietpepsi]

I spoke to the IRS about a potential client with this problem. I said I didn't think the plan sponsor would be willing to file TVC since the plan sponsor had no control over the participants trading. The IRS said only the plan sponsor can file the TVC, not the participant or the custodian. Just FYI.

[mbozek]

Diet: This is consistent with my experience. The plan sponsors haven't a clue as to what is going on in the participant's accounts and regard it as a brokerage problem. Therefore its up to the broker to fix it. The employer who files a TVC has to pay for the cost of fixing someone elses' problem- either the broker or the employee.

[CassandraS]

Piggybacking off this old post, and wondering in there is anything new and/or definitive

What is the corrective procedure if Stock are Trades in 403(b)(7) Account?

Thanks

[mbozek]

Piggybacking off this old post, and wondering in there is anything new and/or definitive

What is the corrective procedure if Stock are Trades in 403(b)(7) Account?

Thanks

sell the stock. Amount contributed to purchase stock is regarded as after tax contribution.

[CassandraS]

Thanks

[PensionPro]

Piggybacking off this old post, and wondering in there is anything new and/or definitive

What is the corrective procedure if Stock are Trades in 403(b)(7) Account?

Thanks

sell the stock. Amount contributed to purchase stock is regarded as after tax contribution.

Is VCP an option also? Apparently this problem is more common than one would think.