Exactly WHY is this transaction wrong?

[AlbanyConsultant]

Owner has a pooled profit sharing plan. In mid-2008, she transfers all the money from the plan account into her personal IRA (which already had $300K in it) under the mistaken belief that she is the only participant remaining in the plan (why she believed this, I don't know). She presumably completed forms from the brokerage house, but nothing plan-specific. She moved ~$250K out which is now worth ~$200K.

Clearly, this is all wrong and needs to be fixed. But why and how?

I think the best-case scenario is to treat this as a loan that juuuuust slightly violates 72(p). So I'd have her return the amount taken to the plan (which means the company would have to find $50K) and also some reasonable rate of interest for the six months it was out of the plan. But this is a client who will need things airtight and in writing (and in excruciating detail), so I want to make sure I'm using the right methods to correct this. Are there any other alternatives? Thanks.

[david rigby]

"Transfers?"

Perhaps you've already researched this, but is there any possible distributable event? Such as eligible for NRA?

[BG5150]

Why is it wrong? Where to start?

1. If she wasn't the only participant in the plan with a balance, she took not only her money, but the money belonging to the other participant(s). Isn't that stealing? Or at best, it is not living up to her fiduciary responsibility.

2. If she is not over 59 1/2, she shouldn't be taking anything other than a hardship or a loan, which, as you know, have their own set of rules, many, if not all, of which probably were broken.

3. Does the plan offer any in-service withdrawls, and under what circumstances? She might not have been able to make a distribution at all.

Would something like this even be correctible under SCP? Is VCP the option here?

[AlbanyConsultant]

No, she's only 61 and the plan allows no in-service withdrawals except hardships

BG5150, I agree that this is a breach - somehow. It's like it's setting off so many alarm bells, I can't figure out which one came first! I have to assume this isn't eligible for SCP, since 100% of plan assets isn't "insignificant".

And I just read that the plan's default distribution method is QJ&S...

[GBurns]

I have no idea how to fix it but that seems to be only part of the problem.

Since this "is a client who will need things airtight and in writing (and in excruciating detail)", I would think that the biggest problem is showing her that some thing is wrong. How can you fix without first establishing exactly what was wrong and getting her to understand and accept ?

My first actions would be to get her to explain "airtight and in writing (and in excruciating detail)" why she did what she did.

If she thinks there was nothing wrong, I do not see her accepting that correction is needed. And where would that leave you ?

[Guest mjb]

Owner has a pooled profit sharing plan. In mid-2008, she transfers all the money from the plan account into her personal IRA (which already had $300K in it) under the mistaken belief that she is the only participant remaining in the plan (why she believed this, I don't know). She presumably completed forms from the brokerage house, but nothing plan-specific. She moved ~$250K out which is now worth ~$200K.

Clearly, this is all wrong and needs to be fixed. But why and how?

I think the best-case scenario is to treat this as a loan that juuuuust slightly violates 72(p). So I'd have her return the amount taken to the plan (which means the company would have to find $50K) and also some reasonable rate of interest for the six months it was out of the plan. But this is a client who will need things airtight and in writing (and in excruciating detail), so I want to make sure I'm using the right methods to correct this. Are there any other alternatives? Thanks.

Your lack of understanding of the consequences of what laws have been violated is why she needs to retain tax counsel who can explain all of the penalities she faces under the IRC and ERISA and how to report the violations. She will not get any free legal advice on this matter.

The use of plan assets by a fiduicary as a personal loan is a prohibited transaction which can result in criminal prosecution.

[Below Ground]

I suggest that BG5150, Mr. Burns and MJB offer important advice. You have a very BIG problem here that can't be corrected by saying it was just a loan that is a little over the limit. You have a fiduciary breach that is very likely to be criminal in nature.

I have found it to be very rare that a fiduciary actually breach involves blatant theft of member monies; but, when found they should be dealt with in a harsh fashion. It is transactions like this that have unfairly given the private pension system a bad name. :angry:

As MJB notes, your client should be directed toward competent ERISA legal counsel. That is the best advice anyone can give you, it appears.

[Guest Sieve]

I wouldn't paint such a picture of doom. A bad act?--absolutely, without question, a VERY bad act. Criminal?--I don't think so, especially if it is properly corrected immediately (like in "right this minute", or sooner), and proper prohibited transaction excise taxes are paid. I would take the aproach that the excise taxes should be based on the full value of the improperly transferred funds (rather than based only on the cost of a loan). Don't be chinsy in fixing this one.

Any hesitancy on the part of the owner to repay fully & pay excise taxes will be critical time lost, and bring you closer & closer to a potential IRS/DOL audit--and make it less likely to convince someone that this was an innocent act (if, in fact, it truly was an innocent act--if it was not, you really have a problem, as stated by others).

But, as has been unequivocally stated, do NOT try to fix this one without competent legal counsel. VCP is not the real issue here--it's the PT & fiduciary breach issues that will be the real problem. And cross your fingers that this plan is not audited by IRS or DOL before it's fully fixed, or else you'll have some real 'splaining to do . . .

[K2retire]

But for the use of the female pronoun, this sounds much like a former client of ours.

The business owner in this case notified us that he was transferring the plan to another service provider and provided us with signature guaranteed wire transfer instructions. Several months later he contacted us again. Apparently his tax preparer had explained that he could not transfer the entire plan to his personal IRA, and he wanted to transfer it all back to us.

We declined to accept it, so I don't know how he ended up resolving the problems.

[Below Ground]

Was my reaction "over the top" with too much gloom? Yeah, I would agree with that. As inferred by K2retire's post, there are a few people out there that don't think the rules apply to them. While I can't say this was true for the OP, it just struck a bad chord with me. (As I think it did for K2.) Of course, life goes on.....

[Guest Sieve]

Below --

There are plenty of bad actors out there, and they deserve what they get. We've all read about (or known/dealt with) them, and your reaction to the "holier than thou" types is probably shared by all of us, especially at this time of year and in this economy.

We in Michigan had to deal a number of years ago with good ol' Denny McLain, fallen pitching hero, who was thrown in jail for stealing retirement plan assets of a legitimate manufacturing business he bought by transferring the assets from the bank trustee to a sham investment company run by his partner in crime. No one felt sorry for him in the least.

I hope the OP isn't dealing with this type of person--although, the client's need for airtight & excruciatingly detailed reasoning makes one wonder . . .