tax-exempt entity

[lexi]

A tax-exempt entity sponsored what it thought was a qualified money purchase plan. They find out in 2004 that the plan was never qualified.

What does the trust have to do now (the trust never filed 5500s, so the statute of limitations never ran on any of the plan years)? Re-calculate its taxable income and file a form 1041?

thanks for any help.

[QDROphile]

Have you thought about rehabilitating the plan? What does "was never qualified" mean?

[Steelerfan]

What about EPCRS and the DOL fiduciary/delinquent filer programs? Depending on how much the penalties would be it might be better than taxing the participants. Remember, It's not just the trust that is taxed, it's also the participants under the economic benefit doctrine.

[Guest mjb]

The NP needs to retain tax counsel to determine their ultimate tax liability. One Q is whether the employees' benefits were vested under the plan in which case they would have taxable income on the vested contributions and income allocated to their accounts under IRC 83. Under IRC 6501 the s/l for collecting back taxes from the employees is usually 3yrs from the date each year's vested contribution/income is allocated unless the amount not reported exceeds 25% of the employee's gross income in which case the s/l is 6 yrs. If the plan is terminated the s/l for the employees tax liability will eventualy expire. Since the trust is conduit taxpayer the trusts's taxable income would be reduced to the extent the employees were taxed on the income of the trust. There would still be a Q on filing the 5500s.

[Steelerfan]

Before it gets that far, shouldn't the plan sponsor as FIDUCIARY at least try to correct the defects, pay the penalty and "regain" qualified status-as intended.

Techically every qualified plan with a defect is "nonqualified". That doesn't mean you throw in the towel, hire fat bloated tax counsel and pay the tax. You go to the service first, that's what the correction programs are there for. The IRS does not disqualify plans as a general rule, they do not "like" to do so, and they rarely if ever apply the draconian disqualification penalty. Also, the IRS will argue that the SOL never ran for obvious reasons.

Why tell a client to give up ship without a fight?

[jpod]

Steelerfan: How dare you? I, for one, am not fat. Often bloated, but not fat.

[Steelerfan]

Steelerfan: How dare you? I, for one, am not fat. Often bloated, but not fat.

Ok. I'll leave out "fat" when referencing you!