Correction for failure to hold assets in trust?

[C. B. Zeller]

On a recent takeover, we found that the account for one of the two participants is an IRA. The plan is a profit sharing plan and not a SEP or SIMPLE. Contributions for this participant are being recorded in the IRA as rollovers, however no distributions were reported on the Form 5500 and the value of the IRA was being included in plan assets.

The obvious correction is to transfer the IRA assets to an account which is under the trustee's control. Whether this can be self-corrected or needs to be done under VCP would depend on whether the failure is significant, as it has extended well beyond 2 years.

It could be considered significant in that it affected 50% of plan participants and a substantial portion of plan assets. It might also be considered insignificant as there was no impact to any participant's financial or tax situation due to the failure.

Has anyone ever encountered this type of failure before? How did you handle it?

[Mike Preston]

No way this is not a significant failure.  Punt to an ERISA attorney.

[Larry Starr]

22 hours ago, C. B. Zeller said:

On a recent takeover, we found that the account for one of the two participants is an IRA. The plan is a profit sharing plan and not a SEP or SIMPLE. Contributions for this participant are being recorded in the IRA as rollovers, however no distributions were reported on the Form 5500 and the value of the IRA was being included in plan assets.

The obvious correction is to transfer the IRA assets to an account which is under the trustee's control. Whether this can be self-corrected or needs to be done under VCP would depend on whether the failure is significant, as it has extended well beyond 2 years.

It could be considered significant in that it affected 50% of plan participants and a substantial portion of plan assets. It might also be considered insignificant as there was no impact to any participant's financial or tax situation due to the failure.

Has anyone ever encountered this type of failure before? How did you handle it?

It's a major problem no matter what.  Mike's advice is correct.  My question is who was doing the work before you took it on and how did they allow it?  I think we have some malfeasance there.

[C. B. Zeller]

Thanks Mike and Larry for the input.

I spoke with the prior administrator who said that it was in fact a plan account but was labeled as an IRA essentially due to a clerical error. His suggestion if I wanted to fix it (if I felt a fix was necessary, since clearly he felt it was fine as-is) was to do a trustee-to-trustee transfer from the IRA into an account in the name of the plan.

I am not sure I buy that argument, if it's labeled an IRA and was not under the control of the trustee then it doesn't have the characteristics of a plan account. If it looks like a duck and quacks like a duck... I would also be concerned that upon examination the IRS would find that the plan contributions were compensation to the employee which should have been taxed, and were also excess IRA contributions.

I also spoke with an ERISA attorney who felt that VCP would be the right course of action. He suggested filing anonymously since there is not a prescribed correction for this failure, therefore the outcome would be highly dependent on the agreeableness of the agent assigned. He also recommended that since the participant is currently over age 59.5 (although the failure began prior to age 59.5), not to move the account back in to the plan, but as part of the VCP submission to consider the account to have been distributed when the participant reached age 59.5, and file amended 5500s and a 1099-R.

[Mike Preston]

I guess it depends on the dialect spoken by the duck.  If it speaks only IRA (the fact is that the account is an IRA) I agree with the ERISA esq. If, otoh, it actually speaks qualified plan (the fact is that it is just a bank account with an improper name in the title) just have the name changed.  The proof is in the pudding!

[Larry Starr]

1 hour ago, Mike Preston said:

I guess it depends on the dialect spoken by the duck.  If it speaks only IRA (the fact is that the account is an IRA) I agree with the ERISA esq. If, otoh, it actually speaks qualified plan (the fact is that it is just a bank account with an improper name in the title) just have the name changed.  The proof is in the pudding!

And all you need to do is check with whatever entity name is on the account paperwork and confirm as to whether or not it is an actual IRA or just a mislabeled plan account.