Plan Participant claims to be a corporation and not subject to withholding

[Guest Calimayhew]

Start laughing..... now.

Client expects serious response to this. It must be Friday.

[Harwood]

Participant should be asked to show where in the 1099-R Instructions or the IRS provided language "SPECIAL TAX NOTICE REGARDING PLAN PAYMENTS" or in the Code or Regulations it states that their rollover-eligible distribution is exempt from withholding.

[JanetM]

Ask him how we amassed any money in the plan, corporation does not receive W-2 income, nor can it defer into CODA.

[Guest Calimayhew]

I thought I'd go the "prohibition against assignment" route since he provided documents showing that all amounts owed to him are payable to the "corporation."

[Belgarath]

I think I'd simply refer him to IRC 402(f)(2)(A). Then I'd refer him to IRC 3405©, and tell him that it makes no difference whether he agrees, or whether he likes it or not, the 20% is going to be withheld. Period.

[E as in ERISA]

Who did the client hire -- the corporation or the individual? What's the documentation? A unilateral document showing he is employed by his own corporation? The company is a contractor; and the individual is not an employee?

Possible repercussions:

Money kicked out of plan.

Deferrals treated as compensation in years contributed.

Income taxes due on those deferrals for those years.

Same for medical premiums.

W-2s corrected to show $0. 1099s issued in their place.

Employer's share of FICA/SE taxes paid by individual on ALL income for those years.

Individual reimburses employer for employer's share of medical premiums.

Individual reimburses employer for vacation pay, sick pay and other employee benefits.

"Contract" with corporation, if any, terminated. He's gone...

[Appleby]

If he is a corporation, what is his DOB- the date of incorporation? Did he meet the age requirement under the plan? Plans usually define participants as individuals who have met the age and service requirements.

OTH, playing advocate … Technically, the definition of an individual could be defined as non-person- including a corporation- IRC § 7701(a)(30)(B)-© defines a corporation as U.S. person ... assuming the payee is a corporation, does that exempt the corporation from withholding? I am not sure, but I am leaning to no. IMO, there are no provisions to exempt a payee from withholding from a QP if the distribution is rollover eligible. Take a look at Treas Reg § 1.1441-1©(2) …what do you think?

[Harwood]

I've seen partners who were Professional Corporations.

That didn't stop them from participating in the Plan.

[Guest Calimayhew]

After the anti-alienation approach, I would love to tell him that since he is a corporation, he doesn't meet the plan's definition of employee and that he is entitled to zip, zilch, nada.

All that being said, this is a pension plan without a lump sum option - since not an eligible rollover distribution, no mandatory withholding and he can elect 0% withholding.

So, maybe my response should just be (in a nod to "Fletch"), "Sure."

[mbozek]

Short answer to this nonsense: Under the assignment of interest rule retirement income is taxed to the person who earns it not any person to whom it is assigned such as a corporation. He can transfer any income he wants to a corp after he pays tax on it.

[Guest JVH]

Harwood: Wouldn't the partners who were PCs be members of an affiliated service group, and thus the employees of the PCs would be deemed to be "employees" of the affiliated service group and the sponsoring "employer"?

In this scenerio, if their is no affiliated service group or control group and the "corporate employee" allowed its underlying employee to participate in the primary employer's plan, don't you effectively have a multiple employer plan? I agree with others that you must look to see who the primary employer paid - the corporation or the underlying employee. If the payment was to the corporation, and yet 401(k) deferrals were withheld, then it does look more like a very sloppy multiple employer plan.