Oops! Escrow account is in the name of the plan!

[Dennis Povloski]

Client sets aside funds into an escrow account monthly to save up for their profit sharing contribution which they make in March of the following year. They always put the funds back eventually.

That's what I've always heard, but I just found out that this escrow account is in the name of the plan, not the employer!

With that knowledge, it sounds more like the plan sponsor is using plan funds for their own benefit. Don't they have a prohibited transaction every time they take money out of this account (even though the funds have not been allocated to participants, yet)? Does this just need an interest deposit into the plan and payment of excise taxes? Do they need to amend past 5500s to check the box saying "yes" there is a prohibited transaction that has not been corrected?

Thanks!

[Bird]

I think I'd first confirm exactly who owns the account. I've seen plenty of accounts titled in the name of the company that were really meant to be plan accounts, and vice versa, so look at the tax id number as well as the titling and, especially if there are inconsistencies, you might consider the intent when the account was opened (e.g. they might have put "plan" in the account name just to indicate that it was to be escrowed "for" the plan even though it wasn't really a plan account.

Just a thought...