Loan to owner

[Bird]

Owner arbitrarily takes money from the plan; he thinks of it as a loan. The plan doesn't permit loans, which sort of doesn't matter because there was no effort to comply with what would have been in place anyway.

So...is it "just" a Prohibited Transaction, subject to penalties and interest and all that? All things considered, that's a relatively painless fix. That's how we see it.

Would there be further consequences or concern if there was a pattern?

[masteff]

Certainly concern. If nothing else, isn't one of the requirements for most corrections to establish procedures/controls to ensure the same violation doesn't recur? How can you say the control is in place if you fully anticipate that management will override the control?

[Guest Eric A]

I think that you also have a qualficiation issue. Participant loans that are not exempt from the PT tax are a 401(a)(13) violation. Take a look at Reg. 1.401(a)-13(d)(2)(iii).

[TPA Bob]

I should have pointed out that once the loan is paid back the Plan will terminate and distribute to the two participants. Probably makes no difference - does appear to be a qualification issue that would require a filing with IRS or DOL (in addition to the excise tax).

The thought was they would be willing to pay the excise tax to avoid taxation of a distribution.

[Bird]

I think that you also have a qualficiation issue. Participant loans that are not exempt from the PT tax are a 401(a)(13) violation. Take a look at Reg. 1.401(a)-13(d)(2)(iii).

But if we don't think of it as a participant loan, I'm not sure that's an issue. The plan prohibits such loans; the PA just ignored the plan provisions. So we fix it by paying the PT tax and returning it to the plan with interest. I'm not saying it's a good thing to plan for; I'm just trying to determine the degree of badness (sorry to get so technical). I do think if it is done repetitively it could DQ the plan.