DB plan - Client rolls over the assets without informing the TPA and actuary

[Jakyasar]

One lifer DB plan, owner only.

Owner rolls over the assets into an IRA without informing the TPA/actuary. This was done 45 days ago. The issues:

• Plan is not terminated so no termination resolutions, required amendments etc
• No distribution forms are completed
• Do not know if married, if yes, no spousal consent
• Rollover was in excess of 415 limits by 100k

Attended the new EPCRS webinar today by ASPPA and looks like not correctible, if I understood correctly:

• By rolling back all assets into the DB plan within 60 days
• Self correction - SCP

For all out there who may have dealt with this situation, what course of action was recommended to the client to take?

Thanks

[Peter Gulia]

Before considering potential corrections or even a communication to the plan sponsor or the participant, consider thinking about these points.

TPA

Has the plan sponsor engaged the third-party administrator to provide tax law advice?

Does the TPA firm employ a worker who is an attorney-at-law, certified public accountant, enrolled agent, enrolled actuary, or enrolled retirement plan agent?

These are the kinds of individuals who might have some right to practice before the Internal Revenue Service [31 C.F.R. § 10.3 https://www.ecfr.gov/current/title-31/section-10.3], and so might receive or make a communication that might get a limited evidence-law privilege under Internal Revenue Code § 7525 (see below).

Could an unprivileged or under-privileged communication make an advisee’s situation worse by turning a failure the advisee might have defended as unknowing into a knowing failure?

Or by creating discoverable evidence that otherwise might not exist?

Would the TPA’s insurance defend and indemnify the TPA against a claim that the TPA provided inaccurate or incomplete advice?

Actuary

Does an awareness that a pension plan might have been or might be tax-disqualified affect an actuarial valuation?

Has the plan sponsor engaged the actuary to provide tax law advice beyond an actuarial valuation?

Could an unprivileged or under-privileged communication make an advisee’s situation worse by turning a failure the advisee might have defended as unknowing into a knowing failure?

Or by creating discoverable evidence that otherwise might not exist?

Would the actuary’s insurance defend and indemnify the actuary against a claim that the actuary provided inaccurate or incomplete advice?

Which communications are unprotected?

Unlike the evidence-law privilege for confidential communications made to get an attorney-at-law’s legal advice, the privilege for confidential communications to get a Federally-authorized tax practitioner’s tax law advice is much more limited. I.R.C. (26 U.S.C.) § 7525 https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleF-chap77-sec7525.htm.

The § 7525 privilege can apply only to the extent of communications made for the taxpayer to get the practitioner’s tax advice that is within the practitioner’s rights of practice. For an enrolled actuary or an enrolled retirement plan agent, this is not the whole Internal Revenue Code.

For example, an enrolled actuary’s practice before the Internal Revenue Service is limited to issues involving specified Internal Revenue Code sections, and the range of them is not intuitive. While an actuary’s practice may include § 401, § 404, § 412, § 413, and § 414, it excludes § 402 and § 415. 31 C.F.R. § 10.3(d)(2).

An enrolled retirement plan agent’s IRS practice rights include issues involving the Employee Plans Compliance Resolution System.

The § 7525 privilege can apply only to a proceeding before the Internal Revenue Service or a Federal court about a tax matter, not anything else.

The § 7525 privilege never applies to a State proceeding, even if the proceeding involves a tax.

If a participant’s spouse or former spouse asserts—whether in a State’s court, or even in a Federal court—a contract claim that the plan’s administrator did not apply the plan’s qualified-election provision when the participant took a distribution, communications with a Federally-authorized tax practitioner other than an attorney-at-law get no privilege.

The Treasury department lacks power to regulate a tax preparer who does not otherwise act as a representative before the Internal Revenue Service. So, a communication with someone is only a preparer is not protected.

This is not advice to anyone.

My explanation above does not reflect my view about what the law ought to be.