Bad Asset - Correction

[justanotheradmin]

Can anyone point me to the IRS or DOL guidance on this subject? I saw something a few years ago, but can't remember where or even exactly when.

Small profit sharing plan is trustee directed, picks a high risk asset that over the course of several years tanks, and becomes worthless.

Trustee (is owner of plan sponsor) wants to make the plan whole for the losses.

I think in 2008 or 2009 a colleague showed me a bulletin or something that had the above facts as a similar example and gave restoration of the losses by the plan sponsor as a permissible correction. I don't know how old the guidance was, I think it was from way before 2008 or 2009, but I think that's when I remember seeing it.

Anyone know what I'm talking about?

Are there other threads on Benefits Link that have clues?

[justanotheradmin]

https://www.irs.gov/pub/irs-drop/rr02-45.pdf

Found it. Or if not it, something exactly on point.

[Peter Gulia]

And for a limitation year that began or begins on or after July 1, 2007, the 2002 ruling’s principle is included in the annual-additions-limit rule. 26 C.F.R. § 1.415©-1(b)(2)(ii)©.

The key driver is that there is “a reasonable risk of liability”.

[jpod]

The only thing the IRS guidance says is that it would be neither a contribution subject to the plan's allocation rules, nor the deduction limits, nor an annual addition. You are still exposed to claims for breach of fiduciary duty and liability for damages as a result of the breach, and the DOL penalty. Perhaps you've mitigated damages by pouring money back into the plan, but your assessment of the damages might be a whole lot lower than what the DOL or a court might find and you are conceding half the battle by the fact that you are basically admitting liability by pouring the money into the plan. Consult an attorney.

[justanotheradmin]

Fiduciary Guidance Counsel and jpod, thanks for the insight, and jpod, I totally agree about the liability issues.

I actually have no expectation that there will be any sort of correction, or that they will consult an attorney, even though we will tell them to.

The advisor thinks the money is 100% the owner's (claims everyone else has been paid out) and now refuses to acknowledge it as plan assets. The advisor seems to be treating it as part of the owner's IRA.

There may be a new trustee soon, so I wonder if that person will want to fix this. We don't do the investments, just some year end accounting. And when there were ginormous losses, it thought for sure there was a typo or unreported withdrawal.

No such luck.