Sched I Line 4d non-exempt transactions

[goldtpa]

Owner over the age of 50, contributed 16,000 to the 401(k). Owner's financial advisor moved the 16,000 to her IRA. Claimed that the law allows for in-service distributions. Her plan does not allow for them. No other accounts were affected.

In filling out the Sched I, should I answer line 4d as yes "were there any non-exempt transactions with any party in interest" Do I also have to file a 5330?

The client's CPA is telling me that I don't. I am pretty sure that I do. I hate when CPAs make you second guess yourself.

Client is preparing to go through VCP once they figure out if financial advisor is going to pay the cost.

[Alf]

We would classify it as an operational defect and not a party-in-interest transaction, but technically VCP is not effective to correct prohibited transactions or get out of 5330s so it probably should be reported.

[QDROphile]

Are either the owner or the financial advisor fiduciaries? The financial advisor appears to be one. Did the financial advisor benefit in any way from the event? Be expansive in your imagination, and include intangible benefits. I suspect that the financial advisor had something to gain from the (mis)use of plan assets, perhaps only indirectly. For example, pleasing the owner for the sake of future business might be enough under 4975©(1)(E) or (F).

[goldtpa]

The owners are the trustees of the plan. Husband and Wife. The broker said that he could move the 401(k) money to the IRA since the law allows for in-service distributions. Owner said it was ok, if the law allows it. Broker obviously benefited to the tune of commissions. They are attorneys, they apparently give all of their life insurance business to this guy. So yes he did to this to get more business from them. He does control the money so that makes him a fiduciary. Uunfortunately he is the friend of the owner. They want broker's firm to cough up dough.

Unfortunately he did this for the 2003 and 2004 plan year. He moved all of the money into the IRA, eventhough she is still employed. Plan never allowed for in-service distributions.

Their attorney said that they have to use the VCP to get a letter so the plan remains qualified and that the IRA doesn't become taxable.

So if this is an operational defect, VCP is a go and line 4d is "NO".

Thanks for all of the input.

[QDROphile]

You just confirmed facts that lead to the conclusion that there were prohibited transactions. The same events can be operational defects and prohibited transactions and each problem needs appropriate attention. You don't get a twofer when you address one problem.

[goldtpa]

Thanks for all of the input. A big help!!