The World of Prohibited Transactions

[Gary]

A one participant owner/emploee DB plan.

Plan in existance three years and owner has never made minimum funding payment.

Only plan assets are close to $500,000 of IRA rollover (prior to withdrawals).

Business owner makes numerous withdrawals of approximately $330,000 over two year period.

No proper loans taken.

The above appear to be all deemed distributions to the owner subject to income and early distribution penalty taxes (under 59 1/2).

The above also appear to be Prohibited Transactions, perhaps all charged to the corporation (or perhaps some charged to individual) and subject to excise taxes.

Assuming we are in agreement with the above (altenative opinions accepted):

It seems if owner terminates the plan he may be able to runa way from future funding deficiencies' excise taxes and just waive his benefits.

However, if the owner were to just terminate the plan and never pay back the loans/withdrawals, what happens to the PT excise taxes? Do they disappear once plan is terminated?

Let's keep in mind any possible leniency due to the fact that it is a one participant plan.

Thanks.

[Guest Pensions in Paradise]

Termination of the plan does not absolve the owner of prior excise taxes/penalties. If that were the case, I could think of quite a few clients who would have just terminated their plans to escape the wrath of the IRS.

Time to retain legal counsel.

[Effen]

You might want to consider having the IRS disqualify the plan. Since he never made a contribution, I assume he never took a deduction, so the impact of disqualification would be minimal.

IRA rollover is most likely improper so he will need to pay tax on that, but he might be able to wiggle his way out of some of that as well.

Definitely... hire a good ERISA attorney.