Owner termination to obtain distribution

[Purplemandinga]

Has anyone run into a situation where a client's accountant demands that a 100% owner of a company be allowed to take a distribution of moneys because the client fired himself? They also revealed that the owner is in dire financial straights. This is a SH plan with no hardships allowed. I'm calling BS, and told them to hire an attorney to write us a letter telling us that the termination would allow the owner to take a distribution of plan money.

They could also terminate the plan.

Is there another way I should be thinking about this?

[duckthing]

I would tell the accountant to look up the phrase "sham termination". (If he's a sole prop the idea of firing himself doesn't make any sense to begin with.)

Is there a reason the sponsor can't just amend the plan to allow himself to take a hardship?

[Purplemandinga]

Plan is safe harbor so most he would be prohibited from taking SH sources and earnings on ED. He still has access to the ED but apparently that isn't enough.

[C. B. Zeller]

1 hour ago, Purplemandinga said:

Plan is safe harbor so most he would be prohibited from taking SH sources and earnings on ED.

This is no longer true in 2019. Final regs are still MIA but see https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-hardship-distributions#4

[ESOP Guy]

I think Duckthing hits it correctly.  There are rules regarding terminations knowing the person is going to be rehired to just get a distribution.  

Look up the term "bona fide termination" and retirement plans.

http://www.employeebenefitsupdate.com/benefits-law-update/2015/2/12/when-a-termination-is-not-a-termination.html

If this person comes "back to work" shortly after they are terminated this blows up.

I also agree a sole proprietor can't fire them self in my mind.  

[david rigby]

5 hours ago, Purplemandinga said:

… a client's accountant demands ...

Ask the accountant if he/she has a cite for this.  (This might be another way of saying, "so what?")

[chc93]

Maybe I'm missing this... but why not terminate the plan?

[Purplemandinga]

4 hours ago, C. B. Zeller said:

This is no longer true in 2019. Final regs are still MIA but see https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-hardship-distributions#4

Even so, the plan document must be updated to reflect this change correct? If the plan document doesn't allow it then its not an option?

[Purplemandinga]

1 hour ago, chc93 said:

Maybe I'm missing this... but why not terminate the plan?

I definitely suggested this. Apparently I have offended the accountant by suggesting he is giving bad advice. 

[ESOP Guy]

26 minutes ago, Purplemandinga said:

 Apparently I have offended the accountant by suggesting he is giving bad advice. 

Truth hurts at times.  

[Lou S.]

1 hour ago, Purplemandinga said:

I definitely suggested this. Apparently I have offended the accountant by suggesting he is giving bad advice. 

You could offer to resign and let the accountant take over plan administration since he fancy's himself an expert in the field.

[jpod]

Just out of curiosity, but (1) why would the accountant think that you could possibly take instructions from him, even if they were appropriate, and (2) if they want to do something wrong how would you be in a position to stop them anyway?  Don't make the client's problem your problem.

[jsample]

Forget the accountant, how can you accommodate your client and strengthen your relationship?

How old is the owner?

Does he have any money sources other than deferrals and safe harbor?

If you amend the plan to allow for hardship does he have an allowable reason?