not a "real" retirement, but completed distribution anyway

[Jim Chad]

The owner signed a letter saying he was resigning, did the paperwork to take out everything, profit sharing and deferrals, then came back to work the next day. He never missed a paycheck. He was age 55, he paid taxes and 10% surtax and spent the money (over $200,000).

It is a large Plan and the CPA wants to note this as a prohibited transaction on the audit they will file with the 5500. Is this required?

I do not have a copy of the document, but I think it did not allow in service withdrawels. Would it matter if it did, since deferrals and gains were taken too? (Not a hardship situation)

Would you note this on the 5500 any where?

Would you go to the IRS and file under one of the correction programs?

Would the IRS require him to pay it back?

Does anyone have any guess as to what penalties and costs might be?

[Mike Preston]

It sounds like the CPA firm is attempting to treat the distribution as a loan in excess of the applicable limits, and therefore a PT.

That sort of sounds like the least problematic way to handle this, although recasting what actually took place sounds iffy to me.

If, after consultation with ERISA counsel the recasting is cast aside, the client should be prepared to file under EPCRS. The more experienced the representative he chooses the less likely the result will be onerous. But it won't be painless.

One possible suggestion might be to go the IRS under an anonymous submission suggesting a retroactive amendment that changes NR to 55 and authorizes in-service distributions. The deferrals and interest thereon would either have to be paid back or that amount treated as a loan. That is best case scenario, upon quick review of scanty facts. Yes, the IRS may require full repayment.

Pure speculation, of course.

There is no place I'm aware of on the 5500 to report operational failures.

If the recasting is deemed appropriate, and it is being treated as a PT, yes the 5500 is the place to report it.

Keep in mind that it may be possible to self-correct in certain circumstances, if the client has the money (doesn't sound like he does).

All in all, this situation screams for ERISA counsel.