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Posted

There seems to be pushback by a recently retired sponsor of their own DC plan who has an unusually large account balance and does not want to terminate as recommended.

They believe the funds and investments are safer under a retirement plan than an IRA.

Posted

They can be, but not necessarily, and such should be closely examined in the person's state of residence (bankruptcy laws). 

The administrative burden - continuing restatements, interim amendments, 5500 filings - and associated costs should be weighed against any real (not perceived) difference in levels of protection.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

Posted

is this a one person plan? DC? DB?

Are there going to be any future contributions, benefit accruals, deposits? If no, then eventually will be deemed terminated whether the person likes it or not. 

If the business has closed because the owner retired - is there even a sponsor? is it an abandoned/orphan plan? 

If its an active plan, other than one retired person doesn't want to take their money - is it a big deal to let them leave it in? 

In additional to possible better protections, some plans have better investment options, pricing, etc than an individual would get themselves with a retail IRA. 

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

Posted

justanotheradmin - i did reference it as a DC plan in the original post. You ask good questions. This has always been a 1-person plan. Owner just made their last contribution, there will be no more. The investments are the same as it would be in an IRA because it is a self directed plan with one of the national investment firms. Should they terminate the plan, they will transfer it over in kind to the IRA.

Posted

There can be reasons for a participant in an employment-based retirement plan to prefer it over an Individual Retirement Account.

Among them, opportunities for guarding a retirement asset from some kinds of creditors’ claims might be better with an employment-based plan (even if not ERISA-governed) than an IRA. This might be so not only under bankruptcy law, but also under other laws. As CuseFan suggests, there is no shortcut; one must get into the details of those laws and how they might apply to facts and circumstances the individual plans against.

The individual might want not only legal advice but also practical advice across her whole team of advisers, including lawyers (for each topic), certified public accountant, physician, actuary, financial planner, investment adviser, and TPApril.

This is not advice to anyone.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Posted

Is the business continuing and he just doesn't have plans right now to make contributions or is there going to be no business going forward. Because the Plan needs a sponsor.

FWIW, I've run one person DC plans in retirement for people where it is clear there are no intended contributions. It usually involves a plan investing in non-traditional assets where the fees to administer the Plan, maintain the document, and file are EZ along with potential for IRA audit are cheaper than if the owner paid a custodian a fee to hold non-traditional assets in an IRA. This can have it's own set of issues but sometimes it works. But you do need either a an on going corp to sponsor the plan or a sole-prop with at least  enough periodic income to be considered active to sponsor the plan.

Posted

Lou S., as you understand the IRS's view, is it enough that the plan's sponsor is a corporation, limited-liability company, registered partnership, or other business organization in good standing with a State's government official, even if the organization happens to have no income for several years?

(My question is not rhetorical or presuming either answer; rather, I seek to learn about the IRS's thinking from those who have experience I lack.)

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Posted

To rephrase something stated by @Lou S. and @Peter Gulia, check the plan document; many will contain language that automatically terminates a plan when/if the plan sponsor is bankrupt/liquidated/etc.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

Posted

Aren't we in the context of a sole proprietorship, though, and the old question as to when one of those "retires"?

Posted
16 minutes ago, Peter Gulia said:

Lou S., as you understand the IRS's view, is it enough that the plan's sponsor is a corporation, limited-liability company, registered partnership, or other business organization in good standing with a State's government official, even if the organization happens to have no income for several years?

(My question is not rhetorical or presuming either answer; rather, I seek to learn about the IRS's thinking from those who have experience I lack.)

That's a good question and one I can't say I had come up in practice in quite some time.  The last one I had was a sole proprietor in his 80s who had not made a contribution for many years but it sailed through audit because he kept great records and did have some level of continuing Schedule C income. I believe this was in the early 2000s if my memory is correct. His kids eventually terminated the plan after he passed. Once again, he had a good and current beneficiary designation records and a plan to name a successor trustee which helped wrap things up.

I'm not sure what the IRS position would be if the entity had no income for several years and no real prospects to generate future income, that might be a better question for CPA or business attorney.

Posted

I had not imagined that a document would provide a plan ends because the plan sponsor is bankrupt.

Bri, that a plan has and always had only one participant does not necessarily mean that the plan sponsor is a human or her sole proprietorship. Many small business owner-operators, even of a one-human business, use a corporation, limited-liability company, or other form of business organization.

And many keep such an organization in legal existence and good standing for many years after the owner-operator retires.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

  • 3 weeks later...
Posted

The ability to take loans as needed in addition to the potential additional creditor protection could justify the maintenance. Further, the ability to make a wider array of investments subject to the trust agreement could also be a motivating force.

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