New plan... no compensation... only rollover contributions

[K-t-F]

CFP asked me (told me he read a news-letter or was told by someone) if a person can establish a plan and rollover balances from other plans and IRAs to the new plan. There will no be any deferrals (because there is no compensation) or employer contributions. He wants to know if it can be done so he can solely roll other monies into it like IRAs or other QP accounts..

What is the ruling?... do plans have to receive active deferrals and or employer contributions?

[Lori Friedman]

Is this individual a sole proprietor with no employees?

[Belgarath]

See PLR 200027058. I also believe the IRS has publicly stated, at ASPA meetings or some such forum, that it is permissible.

[K-t-F]

Individual has no EEs, I dont even think he has a business. The CFP was vague but the just is he wants to establish a plan and roll $$ into it, consolidate his retirement $$, IRAs and pension $$.

I will look into the PLR, thanks!

[Belgarath]

If he doesn't have a business, then there's a different issue. I do believe there must be a legitimate business in order to sponsor the plan (whether zero formula or not) in the first place.

[K-t-F]

Like I said, CFP was vague.

Where do I find that PLR? (sorry for my ignorance )

Thanks!

[joel]

IS THIS NOT WHAT AN IRA ROLLOVER ACCOUNT WAS DESIGNED TO DO?

[Lori Friedman]

I don't know if PLR 200027058 will help you, but here's a link to it: www.irs.gov/pub/irs-wd/0027058.pdf

[K-t-F]

I am simply answering the guys question. I think he wants the client to be able to borrow. He also mentioned Insurance.... Can you not have life insurance in an IRA?

Thanks

[Guest merlin]

He'll have to be careful what kind of plan he establishes. Profit sharing contributions are discretionary, but must be "recurring and substantial". If the only plan assets are the rollover $ that requirement won't be satisfied. A money purchase plan with a 0% allocation formula will do it, per Jim Holland at an ASPA conference a few years ago.

[Belgarath]

That's correct - no life insurance allowable in an IRA.

[SoCalActuary]

If an individual could choose between IRA or qualified plan, generally the qualified plan offers more options, including investment discretion, insurance, loans, etc. Of course, this also gives the CFP more opportunities for commission producing activity.

However, the qualified plan must have a sponsor, a trust and a trustee. If the sponsor has no business activity, the IRS can question to use of the plan. Who is responsible for the document, 5500 filings, excise taxes (if any), and other issues?

On the other hand, these plans are generally very easy to administer and profitable for the TPA.