ESOP participant ability to sue plan fiduciary

[Guest SA07]

Can an ESOP participant sue a plan fiduciary for mistaken tax reporting if penalties are imposed by the IRS? Is there an ERISA or IRS issue?

[QDROphile]

Was the mistake a breach of fiduciary duty? Was the ESOP harmed, and in what way?

[Guest SA07]

Was the mistake a breach of fiduciary duty? Was the ESOP harmed, and in what way?

Thank you for your post. Yes the mistake was a breach of fiduciary duty. I am trying to figure out if the IRS comes after the ESOP plan participant regarding the mistaken tax reporting, can the participant then go back to the plan/fiduciary and recover and if so, what?

[masteff]

Keep in mind that normally you can't jump straight from problem to lawsuit. What efforts, if any, have been made to get the plan to correct the "mistaken" tax reporting? I presume that since the IRS has gone to the participant, then you are referring to a mistake on reporting of a distribution or excercise (and not a mistake on the plan's tax reporting on form 5500). You don't detail the nature of the mistake (overstated, understated, not reported but s/h/b, etc), so it's hard to speculate what types of cure might be available.

As in any matter like this, you need to get a copy of the plan document and the SPD (do esops have SPDs?) and review the rules for making claims. Failure to follow the specified claims procedure can result in dismissal of lawsuits. Oh, and consult an atty.

[Guest SA07]

Keep in mind that normally you can't jump straight from problem to lawsuit. What efforts, if any, have been made to get the plan to correct the "mistaken" tax reporting? I presume that since the IRS has gone to the participant, then you are referring to a mistake on reporting of a distribution or excercise (and not a mistake on the plan's tax reporting on form 5500). You don't detail the nature of the mistake (overstated, understated, not reported but s/h/b, etc), so it's hard to speculate what types of cure might be available.

As in any matter like this, you need to get a copy of the plan document and the SPD (do esops have SPDs?) and review the rules for making claims. Failure to follow the specified claims procedure can result in dismissal of lawsuits. Oh, and consult an atty.

Thank you. It's an understating mistake on 1099 reporting.

[masteff]

Perhaps someone w/ some experience getting the IRS to waive penalties would post some suggestions on how to try accomplishing that.

[BeckyMiller]

I am curious about the nature of the error. Generally an error in the preparation of a Form 1099 for a plan distribution would not rise to the level of a fiduciary breach. If the participant has received his or her benefit from the plan, you can't sue the plan for anything. You got from the plan what was due to you.

As to suing the fiduciary, it would have to be the party responsible for preparing the Forms 1099 or who was responsible but delegated that work to another group - payroll service provider, TPA, accountant or whatever. But, I just have a hard time seeing where the preparation of the tax report would create any kind of an ERISA claim. HOWEVER, I am not an attorney - just a CPA.

Now, as to getting out of the penalty - it is generally pretty easy to get out of penalties based upon an error in the preparation of a Form 1099 over which the taxpayer had no knowledge or control. To the extent that you owe taxes and interest that is different. Also, to the extent it is the premature distribution penalty tax, there is no room for negotiation, but if it is the late payment penalty, you should be able to negotiate out of it if you can demonstrate that you reasonably relied upon the Form 1099 that was prepared by another party. Emphasis on reasonably relied. If you got a check for $12,000, for example and the Form 1099 said $1,200, they are less likely to let you off the hook. They would say that you should know what you got.

So - lots of miscellaneous information - we can be more specific if you are willing to provide more specific information.

[Guest SA07]

I am curious about the nature of the error. Generally an error in the preparation of a Form 1099 for a plan distribution would not rise to the level of a fiduciary breach. If the participant has received his or her benefit from the plan, you can't sue the plan for anything. You got from the plan what was due to you.

As to suing the fiduciary, it would have to be the party responsible for preparing the Forms 1099 or who was responsible but delegated that work to another group - payroll service provider, TPA, accountant or whatever. But, I just have a hard time seeing where the preparation of the tax report would create any kind of an ERISA claim. HOWEVER, I am not an attorney - just a CPA.

Now, as to getting out of the penalty - it is generally pretty easy to get out of penalties based upon an error in the preparation of a Form 1099 over which the taxpayer had no knowledge or control. To the extent that you owe taxes and interest that is different. Also, to the extent it is the premature distribution penalty tax, there is no room for negotiation, but if it is the late payment penalty, you should be able to negotiate out of it if you can demonstrate that you reasonably relied upon the Form 1099 that was prepared by another party. Emphasis on reasonably relied. If you got a check for $12,000, for example and the Form 1099 said $1,200, they are less likely to let you off the hook. They would say that you should know what you got.

So - lots of miscellaneous information - we can be more specific if you are willing to provide more specific information.

Thank you Becky. The plan administrator is an employer (small company) that completed the 1099 R incorrectly (improper tax reporting - employer was not taxing on stock out of plan). The participant is an ESOP trustee. The main issue is whether, if the IRS comes after the participant, can the participant then go back to the employer?

[masteff]

employer was not taxing on stock out of plan

You say they didn't tax on the stock which is not a reporting issue but rather is a withholding issue and enough different to change our answers (a reporting error means they left something off or they put $10,000 instead of $12,000). Note that if the distribution was of stock, there was no cash for them to withhold from and the participant would still be responsible for paying any taxes due on his 1040.

So let's back up a little since I was assuming it was just that the 1099 didn't match reality. What penalty do you think the IRS might come after the participant for? Please be specific and detailed.