impremissable w/d in Dec 2011 & March 2012 AND....

[doombuggy]

This year seems to be my problem year with clients.

I handle the 401(k) PSP for this client. They also have a DB plan which has terminated. In fact, my co-worker sent the distribution instructions out earlier this week to find that the funds were already issued out.

My plan is valued annually at year end. it allows for deferrals and has a safe harbor match. These monies are placed into individual accounts held by the broker at Schwab. The plan has a pooled acocunt for the profit shairng allocation. While waiting for the client to confirm the contributions for 2011, I was working on reconcilation of the plan. I had previously ask for an explanation as to why one of the participants took $1000 out of her individaul acocunt right before Christmas, but never got an answer (which didn't surprise me, this client is .....and the broker/CPA is no better). The client has asked to terminate the plan in 2012 and we have not started that yet, as we were trying to finish up the 2011 year first. I did some recon for 2012 and see that on 3/1/12 the client allowed the same woman to take an additional $2312 out of her individual account. I emailed the brokers & CPA about this and the response I finally got was there was a letter of instruction from the client/trustee authorizing that the distribuitons be made. Not the broker/CPA has confirmed that no 1099-r was issued by them for her $1000 distribution done in 2011.

The plan allows for hardships only - no loans and no in-service w/d. She continues to make deferrals of $69 per pay it looks like (there are deposits going into her individual account, and the SHM is paid annually). The disbursements total about $200 more than the deferrals she put in for 2010 and 2011 (she became eligible for the plan in 2010). It is possible that she put enough deferrals into the plan in January & February 2012 to make that difference up (we only receive the census data on an annual basis).

What are your thoughts on handling this situation? If it is 2 hardships, she has violated the requirement of stopping the deferrals. I am making an assumption that the money was for one of the 6 h/s reasons, but knowing this client, it could be for any reason, she just asked! Or do you think these are prohibited transactions and need a 5330 for each?

Edit to add that the plan allows for you to take a h/s on the non-elective but only if you are 100% vested, which she is not. She doesn't have any r/o money in the plan from which to take a h/s from either.