Paying IRS penalty + interest

[Lori Friedman]

A qualified plan's TPA made delinquent deposits of taxes withheld from participant/beneficiary payments. The IRS slapped the plan with a whopping penalty + interest.

First, can the plan pay the penalty+interest from its own assets? Or, are the plan fiduciaries responsible for paying the amounts assessed?

Second. The plan, and not the fiduciaries, paid the penalty+interest. If this is a no-no, there must be a reportable nonexempt transaction that's subject to an excise tax (plan loaning money to a disqualified person)? The plan booked the penalty/interest as a receivable from the TPA, and the plan trustees intend to sue the TPA to recover the money.

[SoCalActuary]

Holding an asset of a receivable amount is not unreasonable. Valuing the asset might be an issue if there is any risk of loss. What matters is the ability of the plan to collect. How are the negotiations going? Can the plan withhold fees to the TPA as security against the expense?

In addition, the plan might have paid expenses that could have been waived or mitigated. The trustees would have to make a good case that the IRS payments were the absolute minimum they could have paid.

On the other hand, if the plan paid the IRS as quickly as possible, I would argue that the trustees were trying to minimize the damages.