Client withdrew all the Plan's Funds

I have a client who was in the process of terminating their cash balance plan with their TPA. They got impatient and wanted to speed up the process. In 2024, they withdrew all the plan's funds from the plan's account and deposited the funds into their business bank account. They intended to distribute each participants' funds, in the proper amounts, from the operating account.

Does anyone have experience correcting an error like this with the DOL and IRS? Could this be corrected under VFCP as a below-market interest rate loan to a party in interest? What do you think the proposed correction under VCP should look like? We have already advised them to transfer the funds bank into a trust account for the plan. Thanks!

Does this "sponsor" have an attorney or accountant?  If so, could you "persuade" such person(s) to educate the sponsor about how bad is this situation?  If you do further work related to this plan, you should probably get paid in advance.

I suppose the plan sponsor could treat it as a prohibited transaction, return all the funds to the trust with interest and file a 5330 for the prohibited transaction excises taxes for 2024 and 2025 and then decide if they want to go through VCP to get the IRS blessing on that correction. And then proceed with paying out everyone from the trust like they are supposed to do. Is this a PBGC plan, that could add additional complications.

1 hour ago, Lou S. said:

I suppose the plan sponsor could treat it as a prohibited transaction, return all the funds to the trust with interest and file a 5330 for the prohibited transaction excises taxes for 2024 and 2025 and then decide if they want to go through VCP to get the IRS blessing on that correction. And then proceed with paying out everyone from the trust like they are supposed to do. Is this a PBGC plan, that could add additional complications.

I cannot emphasize enough the point made by Lou above--check with the actuaries as well. If this is PBGC covered, you may have other issues as well. 

Before imagining potential corrections, a service provider might first evaluate whether it wants as its client a person that acts without asking for advice.

2 hours ago, Peter Gulia said:

acts without asking for advice

or ignored what they were likely told at the start (assuming the plan termination process was fully explained at the onset)

On 5/27/2025 at 9:04 AM, Appalachian_Trail said:

They intended to distribute each participants' funds, in the proper amounts, from the operating account.

 

Did they follow through with their "intention"?    Right away?

....  Jeff

Sounds like there is a very large prohibited Transaction. I have seen people criminally charged for less egregious things.