Sch H - Prohibited Transaction ? Tranfer of assets to corp., then pay benefits

[Guest Partly Cloudy]

The plan sponsor of a DB plan was rountinely writing a check from the pension trust to a non-interest bearing corporate account in order to write checks for the monthly benefit payments to retirees. According to the auditor, the exact amount of assets that came out of the trust were used to pay benefits each time. This practice was discontinued towards then end of 2002 when the sponsor (finally) opened up a checking account in the name of the pension trust.

Is there any way that this is not considered a prohibited transaction?

Otherwise, box 4(d) on the Sch. H is checked yes, a Schedule G is attached, and the plan probably ends up getting audited, and the sponsor pays a 15% excise tax. Does that about sum it up?

[mwyatt]

A little confused - you said that the Plan was originally writing an (aggregate) check to the corporation. Practice discontinued when plan opened up a checking account. How did they write checks before opening up the checking account?

[Guest Partly Cloudy]

Good point. Actually, the statements say "distribution to the corp." so the financial institution either transfered the funds or issued an aggregate check. I can find out if it matters.

BTW, the plan has 70 reitrees. The sponsor has some sort of antiquated computer based check writing capability from the corp. acct. and I think they were trying to save money by not having the trust's financial institution issue 70 checks per mo. to the retirees.

[mwyatt]

You know, the more I think about this (at least coming from the small plan market) this whole thing sounds fairly benign to me. Money coming from plan wasn't being thrown into some scheme to make money on the float (a little laughable anyway given current interest rates), but rather a mechanical solution to the disbursement of funds. If anything, given a hypothetical charge of $5 per transaction, this scenario saved the plan $5*70*12=$4200 a year in expenses. Money is transferred from plan and then immediately disbursed using a corporate checking account. On what grounds does this qualify as a PT? I'm sure that there are all sorts of cites out there, but this sure doesn't seem to me to be a nefarious scheme...

[Guest Partly Cloudy]

I agree with you on a practical level. What is the preparers exposure if there is an incorrect entry on the form? BTW, the auditor called it a PT in last years audit report.

I was thinking of recommending to the sponsor that they consult an ERISA attorney for guidance. The excise tax would be approx. $15,000. I can't seem to get comfortable with making the call on this absent definitive guidance. Anything I have read seems to say PT, but some of the people I have spoke with supported your view.

[david rigby]

It is my observation that this happens fairly often, where the plan sponsor is saving administrative expense by taking advantage of its own existing check-writing abilities.

That does not mean it is not a PT. Remember, it is a fool who takes legal advice from an actuary.