Prohibited Transaction

[Guest s1sacm]

Hi Everyone,

Here is the situation, we received a distribution form for a terminated employee in April 2009. This employee was also a trustee of the plan. We did liquidate his assets and now we found out, this employee (Trustee) was really never terminated and now wanting to just terminate their plan. So..this Trustee did lie on the form and gave us erroneous termination date.

Question 1: Would this really be a "Prohibited Transaction", or just a operational failure? I'm having a hard time finding this situation in Correction Programs. The trustee did take it in cash, so the 20% was withheld. I'm thinking before terminating the plan, he should put the money back into his account. Then at the time of termination liquidate again. Any corrective lost earning?

Question 2: I know if this was a "Prohibited Transaction" it must be reported on the 5500. Do optional failure are reported the same way?

Thanks...

[J Simmons]

Hi Everyone,

Here is the situation, we received a distribution form for a terminated employee in April 2009. This employee was also a trustee of the plan. We did liquidate his assets and now we found out, this employee (Trustee) was really never terminated and now wanting to just terminate their plan. So..this Trustee did lie on the form and gave us erroneous termination date.

Question 1: Would this really be a "Prohibited Transaction", or just a operational failure? I'm having a hard time finding this situation in Correction Programs. The trustee did take it in cash, so the 20% was withheld. I'm thinking before terminating the plan, he should put the money back into his account. Then at the time of termination liquidate again. Any corrective lost earning?

Question 2: I know if this was a "Prohibited Transaction" it must be reported on the 5500. Do optional failure are reported the same way?

Thanks...

Given that this is a trustee (fiduciary), you cannot IIRC do any type of self-correction. This is going to involve an application to the IRS under the VCP to fix, but you do not report the operational failure as such on the Form 5500. The question then is whether the fiduciary's use of plan funds during a time the fiduciary should not have had it constitutes a prohibited transaction? I think so, and should also be so reported.

Another concern is the fiduciary violations. You should also consider the DoL's VFCP in this regard.

[rcline46]

If the plan is paying the fees, this is definitely a fiduciary violation. I would say there is also fraud involved if he really did not terminate at the time. However, if you are the TPA you really cannot do much. if you are a fiduciary, then you can report him.