Odd Issue

[Guest elang]

A new client came to us for a consultation with the following problem; and we could use some help.

Two 50/50 partners own a company with approx 180 EE. They were advised by an insurance agent to form a new management company with no other EE and adopt a plan covering just the 2 partners. They adopted an Insurance Company’s 401K plan and made a PS contribution for 2008 and 2009, thinking it was just for the two of them. The TPA that the Insurance Company put them in contact with just now found out about the staffing company and advised them of their problem.

The TPA advised them to reallocate the PS contribution amongst all the 180 EE, which they don't want to do. They would rather amend their tax returns, eliminating the deduction, and try to find a way to get their money back.

The Adoption Agreement is for the 2 partner management company only, it was NOT adopted by the 180 EE staffing company. However, in the Insurance Company’s Basic Docs, "Employer" is defined as the "Adopting ER, and any other employer that is a member of the controlled group, or an affiliated service group."

Must the PS contribution be allocated amongst the 180 EE, even though that employer never adopted the plan? If not, is it possible to get their money back? If so, what is involved and what penalties apply?

Thanks in advance for all of your help.

[QDROphile]

See Rev. Proc. 2008-50, and pay particular attention to provisions relating to egregious failures.

[david rigby]

http://www.irs.gov/pub/irs-drop/rp-08-50.pdf

[KJohnson]

I don't know what you can do with a standardized prototype that covered everyone. I had this come up for a db volume submitter once where the the document did not automatically cover controlled group members. We actually took the Plan to the IRS and asked for an adverse determination. Under Rev. Rul. 91-4 the assets of a plan can revert to an employer a) the Plan provides for the return of contributions if there is an adverse determination letter issued with regard to the initial qualification of the plan, b) the Plan receives an adverse determination letter with respect to its initial qualification, and c) the application for determination letter is filed within the applicable remedial amendment period...

[K2retire]

BTW, it may be a bit unusual now, but it's not really an odd issue. This is exactly why the controlled group/affiliated service groups exist. The government doesn't want business owners to do what they did.

[rcline46]

And yes, I would put the 'person' who recommended this on notice of an impending lawsuit for damages due to malpractice.

[david rigby]

They were advised by an insurance agent to form a new management company ...

Taking legal advice from an insurance agent?