Failure to follow plan terms

[Guest jc1457]

This is a follow up to my earlier question. We are a CPA firm that has been asked to complete Form 5330 for a Plan that was audited by the DOL. The DOL found that the Plan did not follow it's terms for years 1994-2002. Specifically, one of the Plan's investments was not an allowable investment according to the Plan Document/ Trust Agreement. The Plan had some of it's assets invested in a Pooled Common Stock Fund. THe Bank that sold the investment was also the Trustee. It was always the intention of the Plan Sponsor and the Trustee to invest part of the funds in the Pooled Common Fund. Inadvertantly, the amendment adopted in 1994 did not include this as an investment option.

The DOL allowed the Plan Sponsor to retroactively amend the Plan Document to allow for the specific investment for the years 1994 - 2002. Additionally, it it's closing letter, it strongly advised that the Employer file and pay an excise tax on Form 5330 for prohibited transactions for the years 1994 - 2002.

As I read through the regulations, I don't believe this was a prohibited transaction. I believe that this is a failure to follow the Plan's Terms. Am I right? Should I advise that the Plan be corrected through VCP?

Thank you!

[jpod]

Unless the DOL examiner was completely off base, the trustee of the common fund must have been a party in interest to the plan. Look at Section 408(b)(8) of ERISA and Section 4975(d)(8) of the IRC.

[Guest Sieve]

The DOL's closing letter should indicate the theory behind the proposition that there was a PT. Do you know what the position of the DOL is? And, yes, I'd correct the document under VCP -- although that doesn't help the PT issue.

[Guest jc1457]

The DOL's closing letter should indicate the theory behind the proposition that there was a PT. Do you know what the position of the DOL is? And, yes, I'd correct the document under VCP -- although that doesn't help the PT issue.

The Trustee is a bank. IT maintains the plan document/trust agreement and did all the plan's recordkeeping. The funds where invested in many things - one of them being the bank's pooled fund.

THank you for your help with this.

[Guest jc1457]

Also, I am at home right now and do not have the letter in front of me. I will state the DOL's position tomorrow.

Thanks again for all your help with this.

[Guest jc1457]

I have a copy of the closing statment with me now.

The DOL states that Section 4975 of the Code imposes a tax on disqualified persons (parties in interest) who engage in prohibited transactions.

The DOL position must be that the bank/trustee should not have invested in the bank's common fund and that by doing so, they violated the prohibited transaction rules. I will review the sections ipod had mentioned earlier.

It was always the employer/plan sponsors intention of being invested in the pooled common fund. In fact, since the Plan's inception, the Plan held some portion of it's funds in the Pooled Common Fund. THe problem lies with the amendment that took place in 1994. The amendment did not reflect the plan sponsor's correct intentions. This was an oversight on the bank's and plan sponsor's part.

Any help would be greatly appreciated.

Thanks again.

[Guest jc1457]

I'm sorry about all these posts.

Per JPOD's recommendation, I've read 4975(d)(8). I can understand the point that the DOL is making now. Thank you so much JPOD.

I udnerstand that there is no statue of limitations with this and that years 1994 - 2002 need to be corrected.

I do have one more question which I hope someone can help me with. The DOL did allow the bank to retroactively amend the Plan Document for the years 1994 - 2002. This Plan has not been audited by the IRS.

My final question then - can we avoid paying the excise taxes if we file under VCP? I'm afraid of what the excise taxes will amount to.

Thank you again.