Old plan troubles / New plan for individual

[Santo Gold]

Owner of a small business has run into some major legal trouble. Company is going to go through bankruptcy, likely will be dissolved. Owner is likely to be sued as well. He has already taken steps to terminate the companies 401(k) Plan and many employees have already been let go.

(1) The plan expenses are paid from the plan assets. Knowing the condition that the company is in, the accountant and the TPA want paid immediately for 2012 and 2013 work before anyone is paid out. The owner (who is close to age 70) has the largest account balance and wants to roll his money out of the plan. However, the brokerage firm where his (and all participants) assets are held is not willing to release all of his money for the rollover because of the fees that the CPA/TPA want up front. They want to prohibit him from rollover over $20,000 of his balance in order to cover these fees.

Can they do that? Isn't that the trustees decision? Is there a cut and dry answer to this? I believe they have an institutional trustee, not individual trustees.

(2) Same owner has some rental income, separate from the above business. In order to have some income sheltered from creditors, he wants to be able to defer some of that rental income into a new retirement plan, that would cover just him and maybe his wife. Right now he has been declaring that rental income on his personal tax return via schedule C. Could he set up a new business entity based solely on his rental income, and in turn establish a profit sharing plan in which he can deposit up to 25% of this income?Seems OK to me.

(3) If #2 above is OK, could he roll his account balance from the plan in #1 above into this plan, allowing that to be sheltered from creditors as well?

(4) If he could establish a plan like in #2 above, and if he could somehow have his wife eligible to be in this plan, could she roll any unrelated IRAs she has into this plan? Her goal would be to shelter some of her IRA money from creditors as well?

Thanks for any comments. They obviously will have legal help on this but I wanted to see if any of the above are possible solutions.

[rcline46]

On the second item, rental income is clearly passive income and not eligible compensation for plan purposes, so all of the second item goes away.

On the first item, we NEVER let the principal take his/her money first. All expenses and all employees must be paid first. And if he/she does not like it, we encourage them to call the DOL and discuss the issue.

[david rigby]

Accountant? Hmmm. Assuming this refers to a plan audit, can the plan reduce the number of participants below 100 before 2013?

[K2retire]

If he's truly trying to shelter personal assets from the bankruptcy, he ought to be trying to keep his balance in the plan as long as possible. In many states IRAs are subject to creditor claims.

[MoJo]

On the second item, rental income is clearly passive income and not eligible compensation for plan purposes, so all of the second item goes away.

While I would ordinarily agree - I question why the rental income is on Sched C instead of Sched E. To the extent that a "management" or other "active" business operation exists that does more than own realty and collect the rent, it is possible that some portion of that income is "earned" for plan purposes.

More detail clearly would be required by a compentant adviser (legal/accounting) to make that determination (and there is a lot of gray areas).

[Santo Gold]

Accountant? Hmmm. Assuming this refers to a plan audit, can the plan reduce the number of participants below 100 before 2013?

They'd like to and that may be in the cards.