Owner withdrew too much

[Cynchbeast]

We have a plan where the owner has over 80% of the assets. Without consulting with us first, during 2012 he took out the majority of the money in the trust (nearly $473k), which was much more than his vested balance, leaving himself with a negative balance and insufficient money at the end of the year to cover all the other participants' balances. The trust now has about $50k and all other participant balances total about $97k.

Has anyone encountered this before and what suggestions do you have?

[ESOP Guy]

The owner has to make the plan whole by putting money back into the plan-- end of story.

Given the size of the error I am not sure this can be self corrected or if it needs a VCP.

But at risk of restating the obvious get the money back into the plan ASAP.

This is the type of facts the DOL lives to drop the hammer on someone in my opinion. The reality is if one of the participants goes the DOL the owner doesn't have a good defense.

[Belgarath]

PROHIBITED TRANSACTION!!! He's darned lucky no participant has gotten wind of this and reported it to the DOL. And among other things, if the 5500 form has already been filed without showing a PT, it needs to be revised to show it. The Fiduciary needs to get this corrected, with all appropriate penalties, etc. IMMEDIATELY.

[BG5150]

Was this person otherwise eligible to take a distribution?

When did this happen? '12 or '13? If '12, did someone do a 1099? 945?

Clients! Nuthin' but trouble, I tells ya!

[ESOP Guy]

Clients! Nuthin' but trouble, I tells ya!

Yeah if it weren't for those darn clients one could get so much work done. If only we didn't need them to pay the bills.

[BG5150]

Clients! Nuthin' but trouble, I tells ya!

Yeah if it weren't for those darn clients one could get so much work done. If only we didn't need them to pay the bills.

You mean you guys aren't independently wealthy and are doing this for kicks and giggles?

[Kevin C]

I have. We picked up a client a few years ago in a similar situation after the DOL came to visit. We worked out a correction and had it approved by the DOL. About 6-8 months after everything had been repaid, there was a criminal investigation and grand jury. He was offered basically deferred adjudication and his attorney was trying to get the matter closed without it. Many months go by and it seemed the attorney was successful. Then, a new prosecutor was assigned and is seeking criminal charges again. The Forms 5500 are one of the issues involved. The prior TPA prepared Forms 5500 showing no PT and the client signed them and filed them. Apparently, the prior TPA is being considered a co-conspirator.

My suggestion is to correct the PT ASAP and pay the excise taxes. Report it properly on the Forms 5500 for all affected years. Then, tell the client to hope it doesn't become a criminal matter. And, charge by the hour!

[Bird]

My suggestion is to correct the PT ASAP and pay the excise taxes. Report it properly on the Forms 5500 for all affected years. Then, tell the client to hope it doesn't become a criminal matter. And, charge by the hour!

Yup. I think if it is fixed right away it's not a disaster...of course, I'm sure the client needed the money and can't pay it back, but Kevin's commentary above might help him find some way to pay it back.

[Lou S.]

Yeah right now it is a prohibited loan to the employer/owner. If he doesn't pay it back, it is called theft and generally has criminal implications.

[Kevin C]

There can still be criminal charges even if the amounts are repaid with lost income. Our client repaid everything and the DOL is still calling it embezzlement. It might have gone easier on him if he had come to us for help before the DOL got involved, but maybe not. I'm sure he has spent a sizable amount on attorney fees over this, not to mention the excise taxes and our fees. Not reporting the PT on the 5500 makes it worse and can get the form preparer involved. Did I mention that he didn't hire us until after the DOL came to visit?