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In-Service Distribution or Prohibited Transaction?


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A sole-proprietor write various checks from the profit sharing plan to various companies throughout the year for personal expenses. The sole-proprietor indicates it is an in-service distribution. Form 1099-R was filed and distribution was included in income on the Form 1040. Is this correct?

Or would it be a prohibited transaction since the sole-proprietor is a disqualified person?

Would this be considered an in-direct loan to the disqualified person?

Thank you.

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Was he already eligible to take an in-service withdrawal?

The sticking point with me is that the checks were written directly to people or entities other than himself, thus, perhaps, violating the anti-assignment rules.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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It could be considered a couple of different ways. If he is eligible for in-service distributions, then yeah, they could be just that, albeit probably with failures to provide notices, to properly have the money paid to him and (it sounds like) failure to withhold. This raises questions about who prepared the 1099-R, at least for me...did they just think it was SOP so this will likely continue, or did they scold and berate him for being ignorant and/or simply a jerk, and explain that this wasn't really a "fix" but the best way to report it...?

If he's not eligible for an in-service distribution then yes, it's a PT of some kind. Not my area of expertise on how to fix that.

Ed Snyder

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What does the sole proprietor's legal advisor say? Oh yeah, judging from the original post, the sole proprietor obviously doesn't have one, or everything would have been handled differently!

...or the sole proprietor is an attorney. <_<

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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What does the sole proprietor's legal advisor say? Oh yeah, judging from the original post, the sole proprietor obviously doesn't have one, or everything would have been handled differently!

...or the sole proprietor is an attorney. <_<

Somehow that reminds me of the old saying that an attorney who represents himself has a fool for a client!

Always check with your actuary first!

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