Owner took too much in withdrawals

[Cynchbeast]

Leave it to our clients to drive us crazy.

We have attorney client who was desperate for money and withdrew over $470,000 from his plan in 2012 without consulting us. After running calculations for 2012, this left his own profit sharing account overdrawn by approximately $42,000, and left the trust with only $50,000 remaining to cover other participants' balances totaling about $92,000.

We have referred him to an ERISA attorney to resolve this - we will not get involved. However, I have to prepare the 5500-SF for 2012, and I have never encountered this before.

1) I assume the transaction has to be reported on the 5500-SF somewhere, probably in line 10. Can someone please advise me where they would report this, and do I report the entire $472,9500 transaction, or just the $42,000 he is overdrawn?

2) I also assume we have to prepare a Form 5330. Same basic question - where on the form is this reported and what amount do I list?

If not for the clients, we might still be sane. But we would also be broke.

[Andy the Actuary]

"However, I have to prepare the 5500-SF for 2012"

No, you don't. There is nothing in ERISA that forces you to work for someone who flouts the law.

[Cynchbeast]

Yeah, but my boss wants to - the client has already paid us for 2012 and he doesn't want to get THIS particular attorney angry and cause us more pain.

[david rigby]

You could wait for the ERISA attorney to weight in. Or you could run!

The payment must be reported on Line 8d. Also must consider how to complete Line 10b and 10d.

However, this is much more than a 5500 problem. Perhaps the owner wants to consider the $42K as a loan between the plan and the participant? Prohibited transaction.

BTW, was there a distribuable event?

[david rigby]

Duplicate post.

http://benefitslink.com/boards/index.php?/topic/54299-naughty-owner/

[Cynchbeast]

As for distributable event, the owner turned 66 last year. Although no termination, disability, hardship, etc., he was eligible for in-service distribution when he took the money.

And a final (technical) question about reporting the PT - plan earnings are allocated annually, after PYE (12/31). If I allocate earnings BEFORE any distributions, he is obviously in a better position. But in considering the balance he has available for withdrawal, can I consider the earnings or not? Balance available for withdrawal PRIOR to earnings is $364,109; balance AFTER earnings would be $430,899. In this case, it clearly makes a big difference.

[BG5150]

Why is it a 5500 issue? PT b/c it involved a Trustee? if so, I think the $42,000 is the amount involved.

It's an operational failure--distributed too much. Correct under EPCRS.

Might want to do VFCP, too.

[ESOP Guy]

Why is it a 5500 issue? PT b/c it involved a Trustee? if so, I think the $42,000 is the amount involved.

It's an operational failure--distributed too much. Correct under EPCRS.

Might want to do VFCP, too.

It is a 5500 issue because you have to mark box 10(b) if it is a PT.

[ESOP Guy]

As for distributable event, the owner turned 66 last year. Although no termination, disability, hardship, etc., he was eligible for in-service distribution when he took the money.

And a final (technical) question about reporting the PT - plan earnings are allocated annually, after PYE (12/31). If I allocate earnings BEFORE any distributions, he is obviously in a better position. But in considering the balance he has available for withdrawal, can I consider the earnings or not? Balance available for withdrawal PRIOR to earnings is $364,109; balance AFTER earnings would be $430,899. In this case, it clearly makes a big difference.

Wouldn't this be a document question? Shouldn't the document tell you the order of the earnings allocation? Seems like most would be BB-dist but it could be different,. Even if this is a PT I don't see why you wouldn't follow the document for allocating earnings.

[Kevin C]

I suggest you consult with an ERISA attorney before you complete the Form 5500-SF. From your questions, you appear to be looking for ways to minimize the appearance of the PT. There is a chance that trying to help your client could backfire on you.

With our client who is working his way out of a similar situation, their former TPA first attempted to remake the withdrawals into a participant loan for the owner. Then, when the withdrawals exceeded $50,000, the former TPA came up with another creative way to avoid calling it a PT. The timeline from the DOL's criminal investigation says the conspiracy to hide the embezzlement, that included both the client and the former TPA, started with the attempt to turn the PTs into a participant loan. Even if they are able to convince the DOL to not press charges, I'm sure they are spending a significant amount on attorney fees.

A frequent ASPPA speaker uses an appropriate phrase. Don't make the client's problem your problem.

In case you are wondering, the Forms 5500-SF we prepared for our client listed the total amount withdrawn, plus accrued lost income as a PT each year through and including the year everything was repaid. The only "problem" we have with this case is the extra time we've spent. We bill by the hour for that, so I don't consider that much of a problem.

You mentioned possibly treating most of the withdrawal as a distribution. Was a 2012 Form 1099-R filed reporting it?