Prohibited Transaction

[Fielding Mellish]

Plan is a profit-sharing plan. It was notified of a tax penalty. Plan administrator mistakenly paid out of plan assets. A couple questions:

1) Is this a prohibited transaction, or something else? The money went to the IRS, not to a fiduciary.

2) If it is a prohibited transaction, do you believe the plan can avail itself of the correction program? Looking through the DOL materials, I would say no.

3) If a profit-sharing plan has a tax due, or a tax penalty due, who is responsible for paying it? And out of what account?

Thank you for your thoughts.

[ETA Consulting LLC]

Without details, it appears as if the Administrator used Plan Assets to pay a tax penalty. While plan assets may be used to defray reasonable plan expenses, the question is whether or not an IRS tax penalty is a reasonable expense. In my opinion, that is a negative.

Given that, the administrator used plan assets to pay expenses that may not have been reasonably borne by the plan, so the plan should be reimbursed. This creates a grey area, but there are several 'reasonable' methods to correct. Sorry, I am not more definitive, but would recommend not treating it like the 'end of the world'.

Good Luck!

[Fielding Mellish]

Without details, it appears as if the Administrator used Plan Assets to pay a tax penalty. While plan assets may be used to defray reasonable plan expenses, the question is whether or not an IRS tax penalty is a reasonable expense. In my opinion, that is a negative.

Given that, the administrator used plan assets to pay expenses that may not have been reasonably borne by the plan, so the plan should be reimbursed. This creates a grey area, but there are several 'reasonable' methods to correct. Sorry, I am not more definitive, but would recommend not treating it like the 'end of the world'.

Good Luck!

Yeah, I agree with the whole "end of the world" thing. It isn't a huge amount of money, but it is what it is.

Thanks.

[Ron Snyder]

A loan (via tax payment) by the trust to the party in interest who owed the excise tax is a PT pure and simple.

Has ERISAtoolkit developed his own self-correction procedure? The VFC doesn't permit such self-correction without an application (and the inevitable fine).