Sponsorship of DB plan by inactive corporation

[Guest ActuaryWannabe]

I administer a DB plan that is being audited by the IRS. The agent is asking for information as to when the sponsor last had financial activity reflected on their 1120. He seems to be headed toward taking the position that if the sponsor is financially inactive, it is not a bonafide sponsor.

Now I know this to be untrue. However, does anyone have any suggestions as to how I can get this agent to see the light? In a loving and gentle way, of course. I can't justify spending the client's money to defend this point that should, I think, be a no brainer.

P.S. There were no contributions made or deductions taken during the period under audit.

[Belgarath]

Sal Tripodi has reference to an IRS Q&A session from 1998 at the ASPA Annual Conference. The Service apparently stated at that time that a "dormant" entity may be the sponsor of a plan. Perhaps you could obtain a copy of this and this would be acceptable to them?

This answer seems to be common sense anyway - I'd be interested to know how this reviewer justifies his ill considered opinion. For an unincorporated, yes, I can see this, but not for a corporation. Good luck!

[Guest ActuaryWannabe]

That is extremely helpful, and yes I can get access to the Q & A's. Thank you so much!

[Ron Snyder]

It seems to me that the auditor may not be looking to throw out tax deductions (since there were not) but to disqualify the plan, or treat the plan as terminated and the benefits distributed and taxable. Be careful.

I'm not sure that I agree with your position. A retirement plan has to have a legal sponsor. A corporation that is in good standing with the state but inactive may not be an appropriate sponsor. My suggestions to you (and my practice with clients in a similar situation) are:

1. If the client has any self-employment income, have him/her adopt the plan personally as the sponsor (amendment & restatement) or as a related adopting employer.

2. If the client has no self-employment income and will not be reactivating the corporation within the next year, roll the funds over into a self-directed IRA.

[Blinky the 3-eyed Fish]

Veba, why do you go against the 98 Q&A and hold the position that a dormant or shell corporation may not sponsor a qualified plan?

You give 2 fine options, but if it were that easy then of course these situations would be unnecessary. I would suspect the most common situation for continuing a qualified plan versus simply rolling over the funds into an IRA is that the assets held in the plan cannot be held in an IRA or the cost of the custodial fees precludes it.

[Belgarath]

The reason we see most often is the ERISA protection of the assets. Lots of small employers - particularly doctors - tend to find this important. We've had lots of inactive plans where we actually suggest that the client may want to consider terminating the plan rather than paying admin fees forever, and usually they give us the reason that they want the assets protected, and that annual admin fees are a small price for the safety.