Tax with holding

[Guest pbd]

I have been contacted by one of the trustees of a terminated plan. There were three trustees, the two owners plus an employee ( the one that contacted my office).

The company went out of existence in mid 2002. The plan terminated and all funds were distributed in 2002. 7 of the participants took lump sums and had the 20% taxes withheld, a total of $9000. A letter was written by the broker and signed by one of the owner trustees to the investment company telling them to issue checks to the employee equal to 80% of the distribution and a check for 20% payable to the Plan Sponsor. The 20% check was deposited in a company checking account. Before a check could be written the bank seized the account to cover funds owed the bank by the company.

The broker indicated that this procedure was use because the TPAs he works with say that is standard procedure in handling the tax with held. I think is the easy way but I have always felt that any funds transferred from a plan to the plan sponsor was a prohibited transaction.

The question now is who is liable for the $9000 plus interest and penalties?

The company (no assets)

The trustee that signed the letter

All 3 Trustees

The broker who wrote the letter

The investment company who issued the check to the company

PS no 1099s have been issued.

[mbozek]

Under IRC 3405 the plan administrator is responsible for withholding and reporting of distributions. In small plans the plan sponsor usually does not pay to provide a separate checking account for the plan trustee. Paying the withholding taxes to the employer was a violation of the tax law because the plan assets cannot be transferred to the employer. The plan admin has a responsibility to provide the 1099-R. I think the plan admin should pony up a check for 9000 for withholding plus penalites. The investment co cannot be liable if it followed the directions of the trustees to issue the check. The broker should know better than to rely on a TPA for tax advice.

[Guest pbd]

That was my first answer, however the document defines the administrator as the sponsoring corporation. It has been disolved and has no assets.

I agree that the investment company is not liable but I would think that Schwab

with all the pension business and attorneys on staff would a least question issuing a check of Plan assets to the Sponsor.

[Mike Preston]

I think the Bank might be convinced to pay the money to the IRS. The Plan Sponsor was operating as the agent of the IRS when it accepted the money from the investment company. Worth a shot.

Maybe the IRS would even help.

[mbozek]

pbd: Suggest you read the custodial agreement between shwab and plan sponsor-these agreements provide that Schwab can rely on instructions from plan fids as to where the funds are to be directed. There is also a hold harmless agreement that provides that if Schwab is liable for making an incorrect payment at the direction of the fids, then the fids/ plan sponsor are liable to Schwab. Also the Plan Sponsor's agreement with the bnak permits the seizure of assets in the checking account to pay debts owed to the bank. The tax problem was the result of the failure of the plan sponsor to maintain a separate checking account for payment of distributions from the plan. The bank is not liable for the withholding taxes because it did not agree to act as agent to withhold taxes as required under IRC 3405. Under the IRC certain officers/fids can be held liable for taxes owed to the IRS. The fids should consult a tax advisor. Of course if a 1099 is never filed with the IRS there will be no record that a distribution ever occurred or that taxes were withheld.

[QDROphile]

When a named fiduciary is the corporate sponsor, there is a very high probability that the directors and executive officers of the company will be identified as fiduciaries. It is always a bad idea to name the company as a fiduciary. In most cases, the "plan administrator" is a fiduciary. Kirk Maldonado makes a decent argument that the plan adminstrator need not be a fiduciary if the duties are carefully limited to only those duties specified for plan administrators under ERISA rules. But plan documents almost never have such limitations.