DB Plan - one lifer - decides to roll over the assets without consulting anyone

Hi

This is a first for me. Need to see what others did in this situation and if any permissible correction is available.

Frozen DB plan, one lifer. Do not know if married but to complicate, let's assume married.

Plan was underfunded under 417e so no excess issues and no 415 issues.

In December decides to roll over the assets into an existing SEP IRA without even hinting to me. Rollover happened on 12/15/2022 so termination resolution and distribution forms had to be executed before 12/15/2022 - neither of which is done.

DB account is still open with a few dollars.

What to do to correct all this?

Any expert opinion/comments appreciated (other than run away - seriously thinking about it).

Thanks

Can you amend for in-service (assuming he is old enough) and get election forms completed (with spousal consent if applicable)?

Then terminate the Plan?

I "think" both of those issues are eligible for self correction under EPCRS.

The other option which might be more prudent on your part is to refer him to ERISA counsel and then walk away.

No in-service - 42 years old. Besides, can you amend retro to 2022 and add in-service even if even old enough? I do not think so (might be missing something here).

Intent was (as was just disclosed today) to terminate early in December and roll out the assets.

I am sure this has happened many times (just not to me) and there may be a way to get it fixed without involving VCP/attorney (I do not see how but no experience on this matter), just exploring others' experiences.

My memory was off on Self correction by amendment, you can't correct in-service by retro-active amendment to conform to operation, it's you can amend hardship retro active to conform to plan's operation, and only if it was primarily for NHCEs who were affected.

So in this case the only "correct" way to fix is through VCP.

Now if the client finds the resolutions he adopted in December 2022 terminating the Plan in December 2022 and gives them to you, I'll leave it up to you whether you want to walk away from the plan or play audit roulette.

As for the failure to get Spousal consent, the fix is to get Spousal consent. If the spouse can't or won't consent the Plan is responsible for paying the spousal benefit.

You could ask him to return the money to the trust.  Since it was always held in a qualified account, he could just put it back.  No, not perfect, but would be easiest solution.   Maybe treat is as an party-in-interest loan, or just an improper transfer.  Did anyone issue a 1099?  How did they classify the distribution?

Surprised the IRA custodian took the money as a rollover without proper distribution paperwork?  You could also inform the IRA custodian that the distribution was not qualified.  That usually perks them up.

Don't know why you don't want to get an ERISA attorney involved - don't make your client's problems your problems.  Recommend he hires an attorney if he want to clean it up.  There may be creative ways to handle this.  Terminating the plan and getting proper consents now isn't a horrible idea, just be clear with him that it is not a "solution".  He still may be in trouble for taking an improper distribution, and the IRA could be disqualified.   

If he doesn't care to clean it up, then just walk away.  Send him a letter laying out the issues and remind him that the IRS will likely come knocking once the 5500 is due.

Effen

I am not against having an attorney, in fact it is a must have. I am definitely not making it my problem here especially for a client who did not even bother to let me know.

One question on your comment (for my curiosity) "Terminating the plan and getting proper consents now isn't a horrible idea", are referring to a termination date in December of 2022 or current date as it is one year of valuation vs 2 years.

I hate these issues.

It would need to be a 2023 plan termination, but not sure how you would do the 2023 valuation unless he puts the assets back, so that might not work.  

But, maybe he has a board resolution or something from 2022 where he terminated the plan and just forgot to tell you.  Sometimes clients find things in their drawer.   I think it would be ok to amend the plan in 2023, assuming he can demonstrate action in 2022.  The amendment is just codification of the action.  This is where an ERISA attorney might be more helpful.

I am curious about the 1099.  Was the distribution reported?

2 hours ago, Jakyasar said:

No in-service - 42 years old. Besides, can you amend retro to 2022 and add in-service even if even old enough? I do not think so (might be missing something here).

To address your question re: retro amendment, I had a similar situation a few years ago but it was a DC plan not DB.  The client attempted to set up a new DC plan account and transfer assets but instead filled out the paperwork for an IRA.  The plan did not have an in-service provision.  We retroactively amended the plan to allow for the in-service and filed a VCP application.  Went through without a hitch.  Very fast approval from the IRS.

2 hours ago, Effen said:

It would need to be a 2023 plan termination, but not sure how you would do the 2023 valuation unless he puts the assets back, so that might not work.  

But, maybe he has a board resolution or something from 2022 where he terminated the plan and just forgot to tell you.  Sometimes clients find things in their drawer.   I think it would be ok to amend the plan in 2023, assuming he can demonstrate action in 2022.  The amendment is just codification of the action.  This is where an ERISA attorney might be more helpful.

I am curious about the 1099.  Was the distribution reported?

Do not know if 1099 was done. Attorney it is.

1 hour ago, cathyw said:

To address your question re: retro amendment, I had a similar situation a few years ago but it was a DC plan not DB.  The client attempted to set up a new DC plan account and transfer assets but instead filled out the paperwork for an IRA.  The plan did not have an in-service provision.  We retroactively amended the plan to allow for the in-service and filed a VCP application.  Went through without a hitch.  Very fast approval from the IRS.

Thank you for sharing your experience but no in-service distribution is allowed from an active DB plan for a 42 year old under DB plan regulation. The client simply screwed it and himself up.

I think the real question is do you want the right answer of how this is supposed to be handled.....or.......other?

Right answer on how to be handled. Thank you.