Prohibited Transaction - loan to sponsor

[Cynchbeast]

In obtaining plan year end information, we discovered that the sponsor of the Profit Sharing plan had borrowed $50,000 from the plan:

• Corporation passed resolution approving plan to extend $100,000 line of credit to sponsor
• Sponsor borrowed $50,000 from LOC, with check payable to sponsor and deposited into payroll account to meet payroll obligations
• Borrower later borrowed additional $30,000, and has since repaid about $5,000-$10,000 of the total borrowings

This was obviously prohibited transaction, and in no way can be re-characterized as a participant loan to the owner since there is clear evidence of intent (resolution from Board for LOC and deposit into payroll account). This was an honest mistake by owner, who didn't realize it was prohibited or that he should contact us first.

Ideas???

[MoJo]

Pay it back, pay the excise tax. I know of no other way to correct it.

[jpod]

Might also tell the owner that right now the excise taxes are probably very little but if he let's this fester for a long period of time they could become significant AND he could be personally liable for the excise taxes as well as the DOL penalty.

[QDROphile]

Now the sponsor knows that it made an honest mistake, it should realize the depth of ignorance and start arranging for training for plan fiduciaries concerning fiduciary responsibilities. Otherwise, I think the incident strongly suggests disregard for fiduciary standards.

[My 2 cents]

Assuming that I am reading this right, wouldn't it be the case that the owner would be personally liable not only for the excise taxes but to restore every cent of the loan that is not repaid if and when the sponsor goes under? Using pension plan assets to meet payroll sounds like one of the very worst things that you could do. If it has come to that, it is probably time to close up shop. Much better than draining everyone's retirement account first!

[david rigby]

Yeah, use of the term "honest mistake" might be a stretch.

[Cynchbeast]

Here is the thing - we know this is a prohibited transaction, but are unsure as to how to address that with the IRS:

1. Does this qualify for EPCRS?
2. If yes, which program - Self Correction or VCP?

Does anyone know of a good matrix available that might show which correction program would be appropriate for which types of violations?

[jpod]

EPCRS is available only for tax-qualification violations. The tax-qualification violation here is 401(a)(2) - exclusive benefit. EPCRS is not available to cure exclusive benefit violations. There is no relief available to exposure for plan disqualification here, but the faster it is corrected the better story you have to avoid disqualification. The original advice is the only advice worth giving here: the amount should be repaid ASAP and the excise taxes reported and paid ASAP. Do it today, even if the owner has to put up his own money and even if he has to beg, borrow or steal to raise the money to do it.

[QDROphile]

Jail is not impossible.