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Prohibited Transaction? Correction?


pixmax

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I have an owner of the company who withdrew $70,000 from a pooled profit sharing account in 2015, no 1099 was prepared and no taxes were withheld. The plan does not allow for inservice withdrawals. The owner is over 59 1/2 and he has enough in his account to take the distribution. Can this be self corrected since it is before the end of the 2nd plan year? What are his options? Insignificant? Significant? He would like to return $50,000 to the plan and pay the remaining amount in installments. He does not want the CPA to prepare a 1099 for 2015 and pay taxes, penalties. There is one other person in the plan and the Owner has maxed out on his loans.

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I have an owner of the company who withdrew $70,000 from a pooled profit sharing account in 2015, no 1099 was prepared and no taxes were withheld. The plan does not allow for inservice withdrawals. The owner is over 59 1/2 and he has enough in his account to take the distribution. Can this be self corrected since it is before the end of the 2nd plan year? What are his options? Insignificant? Significant? He would like to return $50,000 to the plan and pay the remaining amount in installments. He does not want the CPA to prepare a 1099 for 2015 and pay taxes, penalties. There is one other person in the plan and the Owner has maxed out on his loans.

Sounds like a "how many things are wrong with this picture" puzzle.

1. Trustee of the plan (and assuming that the money is held in trust may be assuming too much!) violated the law by not issuing a 1099 for the withdrawal.

2. Just checking - did the owner declare the $70,000 when he filed his personal 2015 taxes? If not, sounds like tax evasion (certainly a substantial underpayment).

3. He was paid notwithstanding the plan not allowing in-service distributions.

Probably more. Sounds to me like plan disqualification as a minimum. If they are lucky, no jail time. Whether it's a prohibited transaction or not is a distant 3rd in importance.

Owners need to clearly understand that "It's my money" is a metaphor, not the truth.

Always check with your actuary first!

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I think the best of this worst case scenario would be -

1 Retro amend plan for in-service distribution at 59.5

2 Issue 1099-R for 2015 distribution.

3 Pay taxes on the distribution (file amended tax return if necessary)

I guess there is some crazy argument that might be constructed as it was a prohibited loan to the company and pay the excise tax for 2015 and 2016 and future years if not corrected by the end of 2016 but that seems a very slippery slope given that no promissory note between the company and plan likely to exist.

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