Is It Permissible for a Plan to Pay IRS Penalties?

IRS issued Notice CP1348 assessing penalties regarding a profit sharing plan due to distributions being made to terminated participants without federal tax withholding payments being submitted nor the Form 945 being filed.  The Notice was addressed to the plan and stated that the plan's TIN should be written on the penalty payment.  The employer paid the penalties, which were over $10,000, from the plan - AI says this is a prohibited transaction - do  you agree?  The plan has a pooled arrangement, so if the penalties are a valid plan expense, each participant would be dinged an average of about $300, which could become as issue.     

In my view (which is not advice to anyone), a fiduciary ought not to direct paying or reimbursing from plan assets such a penalty if a fiduciary, a service provider, or an employer is responsible for the act or failure to act that results in the penalty.

That’s so even if a penalty was administratively addressed to the plan.

If an employer paid a penalty but another person was at fault, the employer might get its lawyer’s advice about rights and remedies regarding the other person.