plan disqualification (tax conseqences)

[Scuba 401]

this case involves a rollover to a qualified plan. we think the plan was never qualified and therefore the rollover was improper. i am thinking the tax consequences would be the entire rollover would be taxable and also subject to the 6% excess contributions excise tax.  anyone have any thoughts? 

as a side note i wonder if the IRS would allow  the TP to back out the rollover and roll it into an IRA which and them allow him to start taking RMD's and maybe pay the 6% excise tax for the years the contribution was in the plan.

[Bird]

Never intended to be qualified, or never qualified due to some failure?  Did the participant have reason to think it was qualified?  Is the IRS involved yet?  Just because the consequences of disqualification are taxation of accounts doesn't mean that happens.  If it is some innocent bystander I'd think about letting them roll it out.

[Scuba 401]

Not innocent. he created the plans for the sole purpose of taking the rollover.  i wouldn't say he didn't intend for the plan to be qualified. i would say that the plan probably isn't qualified.   we are assuming for arguments sake the IRS disqualifies the plan to get a  worse case scenerio

[Luke Bailey]

4 hours ago, Scuba 401 said:

Not innocent. he created the plans for the sole purpose of taking the rollover.  i wouldn't say he didn't intend for the plan to be qualified. i would say that the plan probably isn't qualified.   we are assuming for arguments sake the IRS disqualifies the plan to get a  worse case scenerio

I assume the same individual was not in control of the plan that the distribution came from? So you have, maybe, a separation from service distribution from a larger plan and then the distributee starts his or her own company, has the company create a plan, and rolls the money to the plan?

[Bird]

Without knowing why the plan might not be qualified (and therefore not knowing ways it might be corrected to be qualified) I have no opinion.  You're giving a tiny bit of information and asking for solutions to what is really an unknown problem.  In any event it's probably above my pay grade, or at least something I would advise the client to hire an ERISA attorney to fix, especially if I had nothing to do with creating the problem.

[Larry Starr]

On 8/11/2020 at 1:06 PM, Scuba 401 said:

Not innocent. he created the plans for the sole purpose of taking the rollover.  i wouldn't say he didn't intend for the plan to be qualified. i would say that the plan probably isn't qualified.   we are assuming for arguments sake the IRS disqualifies the plan to get a  worse case scenario

You can't just assume it is not qualified.  What is your reason for making that assumption (it may be wrong by itself)?  You need to tell us WHY you are asking the question about the rollover since the question may not even be applicable.

However, theoretically speaking, a transfer to a plan of money that IS eligible to be rolled over but the plan it is transferred to is not qualified would result in a non-qualified rollover, which means it should be 100% taxable at the time of transfer!  Your supposition regarding the 6% excess contribution tax is, I believe, simply not applicable.  It is a whole other problem! 

If it was a situation where an amount was subject to the 6% annual excise tax, which is cumulative, after a number of years, 6% will compound to 100% of his account value as an excise tax! Roughly, after 12 years, he would owe slightly more than 100% of the rollover amount!