prohibited transaction: in-service w/d

[doombuggy]

Employer sponsors a profit sharing plan that has a PYE of 6/30. In February 2011 the owner took $100,000 (he's a participant) as an in-service distribution. The plan is valued annually and we saw the disbursement (which we finally rec'd confirmation of today) when we worked on the asset recon in early September. Owner was age 63 at the time of disbursement. Plan doc states that in-service W/D is allowed at NRA, which is 65.

I am going with the assumption that he can't pay it back (the question from the broker this morning was "what if he can't pay it back?" so.....). The plan year has closed, so we can't amend to change the age for in-service w/d for the PY in which the distribuiton was done.

So, what happens for the PYE 6/30/11 with this prohibited transaction? When reconcilng, log as a payable, even though it might not get paid back?

If we amend the plan in the current year, does that help (since it "stops" the prohibited part of the transaction in the current year)?

Ugh what a mess! Your thoughts are appreciated!

[KJohnson]

Did you look at EPCRS to see if this could be self-corrected as an operational failure and he would just pay it back?

[doombuggy]

Looks like he doesn't have a choice about paying it back. I have a feeling he might not have it anymore (and I have no clue if he even paid taxes on the distribution when he took it; I assume it went to a bank account versus an IRA, but the financial statement just says "wired funds disbursed"). He's still not old enough to take an in-service, but if we amend the plan effective the current plan year to allow for in-service w/d at a younger age (plan is PSP with MPP money also) than NRA, could he in theory take a 2nd distribution to pay back the first one with interest? My thought is that he would then get a 2nd 1099-R (either for 2011 or 2012, depending) for another $100k.

I can just hear this guy telling us to terminate the plan, but that won't make the prohibited transaction go away. He needs to pay the money back or he jepordizes everyone's money (although most of it is his).......

[Lou S.]

Can you correct with retro active amendment lowering in-service requirement to age 62 or 63?