Forget late GUST, How about late everything

[mschwechter]

Plan has not been restated since 1979.

What do we do?

[mbozek]

Review the statute of limitations for taxation under IRC 6501 and see if Schedule Ps were filed with the 5500.

[Everett Moreland]

Submit under EPCRS as a nonamender. I've submitted several of these, some as nonamenders since the 60s. The IRS has been easy to deal with. A fairly painless process.

[mbozek]

Before going to the IRS you should should have the plan reviewed by a tax advisor for expiration of the s/l aginst er deductions, taxes owed by the trust (Sked P) and taxation of participants. If the s/l has expired there is no liability for taxes on deductions and benefits would be paid on an after tax basis.

[Blinky the 3-eyed Fish]

If the s/l has expired there is no liability for taxes on deductions and benefits would be paid on an after tax basis.

Mbozek, I don't understand this comment. Being a nonamender does not necessarily mean the plan is disqualified. In fact, I have never seen the plan be disqualified for this, especially when the plan sponsor is bringing it to the IRS' attention voluntarily. It's really a matter of paying a fee and bringing the plan up to snuff.

[Everett Moreland]

One thing to consider if using mbozek's approach is what is called the duty of consistency, or sometimes the doctrine of consistency. The basis idea is you can't whipsaw the IRS by taking inconsistent positions on the same item in different years. I don't know enough about the duty of consistency to know whether it would apply here. If it would apply, distributions would be taxable. For a recent use by Treasury of the duty of consistency, see the second sentence of the following Treasury Regulation § 1.457©:

"The amount included in gross income on the applicable date under paragraphs (a)(1) and (a)(2) of this section is equal to the present value of the compensation (including earnings to the extent provided in paragraph (a)(2) of this section) on that date. For purposes of applying section 72 on the applicable date under paragraphs (a)(3) and (4) of this section, the participant is treated as having paid investment in the contract (or basis) to the extent that the deferred compensation has been taken into account by the participant in accordance with paragraphs (a)(1) and (a)(2) of this section."

[mbozek]

Duty of consistency only applies if the same taxpayer who creates a violation of the tax law claims a tax benefit because of the violation, e.g., employee claims an exclusion on tax return for a rollover of a distribution but never rolls over the funds and after s/l expires claims the retirement funds as after tax income. Where an employee's benefit in a Q plan was includible as income in a prior tax year because of disqualfication of the plan, the duty of consistency is not applicable because the employee did not create the defect which he is benefiting from because of the expiration of the s/l. Avoiding taxation on a distribution from a disqualfied plan due to the expiraton of the S/l is not for the weak and requires retention of a qualified tax advisor which will deter many plan sponsors.

[Everett Moreland]

Treasury seems to be saying in 1.457-1© that a participant has no basis for purposes of Section 72 for previously taxable amounts that were not included in income. I don't know whether that is a generally applicable rule. If it is, the statute of limitations might not help.

[mbozek]

Participants in disqualified plans are taxed in the year the plan is not exempt from tax to the extent thier interest is non forfeitable. IRC 402(b)(1). Income taxation occurs when the plan is disqualified, not at a later date and the S/l for taxation of income is no more than 6 years from the date for filing the return for the year the income was taxable. IRC 6501.

[mbozek]

Blinky: the reason the IRS does not want to disqualify a plan that has not been amended for 25 years is because under IRC 402(b)(1) the benefits are taxable in the year the plan was disqualified under IRC 401(b) and no taxes could be collected for amounts beyond the 3 yr s/l. By fixing up the plan and charging a fee to the er the IRS is preserving the benefits for future taxation upon distribution.

[Guest Pensions in Paradise]

Mbozek - based on your posts, would the following outcome be correct?

1. Sole proprietor adopts a new PS plan in 1992, and contributes the maximum allowable amount each year from 1992 through 1996. No further contributions are made after 1996.

2. Form 5500's w/Schedule P are timely filed every year.

3. The sole proprietor does not amend the plan for GUST/EGTRRA.

4. The sole proprietor then contacts the IRS in 2005 and says "I did not amend my plan and don't want to. Go ahead and disqualify my plan."

5. The IRS disqualifies the plan.

6. Outcome - the sole proprietor now receives a tax-free distribution of his entire benefit since the s/l has passed.

Something about this isn't right.