Plan Expense Paid Directly By Owner

[Lou S.]

We have a client who holds property/mortgages in his profit sharing plan. His wife accidently paid a bill related to one of these properties with personal funds.

The owner wants to reimburse his wife from the Plan assets. This is a one person plan.

Is prohibited transaction? If so is it correctable under one of the IRS programs or can they just self-correct and document the error.

[Guest Sieve]

I would think that if the Plan reimburses wife, then wife's payment was, in fact, a loan to the plan. Since she is a disqualified person (IRC Section 4975(e)(2)(F)), the lending of money to the Plan is a PT. When she is repaid, the PT is corrected. Then, file a Form 5330 and pay the PT excise tax.

An issue to look into: is there any UBTI (unrelated business taxable income) with the mortgages in the plan?

[ak2ary]

The plan should pay its own bill and have the company that was paid twice reimburse the wife

[david rigby]

The plan should pay its own bill and have the company that was paid twice reimburse the wife.

That could be one alternative, but it places a burden on the payee to (help) solve a problem it did not cause.