Pension Plan gone awry

[sea-tax]

nash-
Sorry to be the notifier of bad news- but I think what you have is a client who has underreprted his taxable wages to employees and therefore underreported his fica and medicare taxes, suta and futa taxes.

To have a pension plan you must have plan documents and most importantly file the necessary Form 5500. This situation sounds to me like your client while well intentioned missed a few but important steps.

No plan that I am aware of allows the empoyer to pay the employee money and hope they put it into a qualified retirement plan.

All retirement plans and pension plans that I am aware of require some common things, plan documents, 5500, custodians and tpa. Whether it be a 401k, SEP, 403B, 457 or other type of defined contribution plan. For Defined Benefit plans some of the same requirements would be needed.

I think as you dive into this you will find that your client has under reported his taxable wages to his employees each year and therefore will have to amend all the payroll reports, w-2 w-3 and tax returns.
Good luck and I will always leave room for me to be wrong but I just don't see how it could be treated anyother way.

[Nashville]

Good observation

Good observations and grasp of the situation, Burke.

Employer does not go through a common custodian. He issues checks and they are told to find a custodian of their own choice. There are "strings attached" to the payments to employees, but I don't know whether there could be any enforcement if the employee went to Las Vegas instead of putting it in a plan. Employees have, without exception, put the money in their own plan.

The deposit of the employee's money into such plans means that the payments are not compensation, but are tax free and result in a zero basis in the plan for each employee.

However, putting the money in a Roth means the money has never been taxed. Seems like the check should be taxable to such an employee, but how??

[Burke]

A Roth can be part of a pension plan. I am gathering she did not send it to the custodian who adminsters this pension plan? I am not sure such an arrangement is legit, but will have to pass judgement on to others more familiar with pension plan rules. Once the employer pays the employee, does he have any control at all over what's done with it? If not, that's compensation.

[Nashville]

A client of mine with four employees has been arranging a pension-plan for his employees, but with a strange arrangement.

1) He writes the employees a check for 6% of their compensation.
2) Each employee deposits their check with a pension plan custodian of their own choice. Employer gets
confirmation that each employee has in fact made the deposit within a few days of receiving his check.
3) I allow him to deduct the checks as a pension plan fringe benefit expense.

After reading this far, I'll bet some of you are already alarmed at this arrangement. But hold on to your seat. It gets better.

In spite of the inherent dangers above, everything has worked well for years and years without a hitch, UNTIL...

4) One of the employees received her 6% in March, and deposited the money into a ROTH. YIKES!! And, as fate would have it, this employee is also my client.

To report in a manner that makes all parties happy, my questions:

a) How does the employee with the Roth report the receipt of the 6% check. Is it compensation? Is it pension income?
b) Is the employer still entitled to deduct all such payments as a pension plan fringe benefit expense?