Pension Plan gone awry

[RJM]

EPCRS filing?

To fix this, it may be worthwhile starting an EPCRS filing, which is an Employee Plans Compliance Resolution filing. It is a long onerous process, but it may be the only way to make all that has happened in the past OK. It would also involve drafting a plan document, preparing 5500's for prior years, and characterizing the Plan Assets as individually managed profit sharing assets. The asset custodians would need to get involved and copy the company with statements going back to inception of the accounts, and properly restrict activity in these accounts. All the cash flows for all prior periods where this Plan was in operation would need to be recreated and documented. Then, after all the work is done, you plead for mercy and it may be possible to escape with only small fees from the IRS.

If the company went through an IRS audit with their OK, this fact would help in the EPCRS filing, but not excuse the deficiencies. The beauty of an EPCRS filing is that you potentially avoid the horrible penalties associated with an audit and a Plan disqualification. It is also very disruptive to the employees, requiring lots of amended returns. I filed one of these 10 years ago with excellent results. The client and I started it out by working with an Employee Benefits attorney for initial guidance, but we did all the work so the attorney fees were low. In the end the IRS and DOL both signed off and the Plan was on sound footing going forward.

[Super Mom]

I know practically nothing about all this, but have found that a person can "recharacterize" the Roth to a traditional, because they were paying into a Roth thinking it was non-taxable all of 2012 and didn't want income for that on W-2 so recharacterized to Tradtional. Hope this helps!

[joanmcq]

Audited by the IRS or audited financial statements? I read as audited financial statements, and that still makes me go "whoa". But if the amounts aren't 'material', they may have missed scrutiny. Or the auditors have no clue about retirement plans.

[Burke]

Wow. That is amazing. But IRS is only concerned with getting its just due of tax, and in this case perhaps it did not matter? A complaint under ERISA might not stand scrutiny, however.

[ruthc]

Was audited!

Burke,
The company had been in business for many, many years and was audited each year. The auditors were fully aware of how it was set up and probably were the ones that suggested doing it this way. They are still very much in business. They would never have done anything that was not ethical nor incorrect!

[JoshinNC]

In effect

So in effect, they were evading the non-discrimination rules for pension plans. IRS might have had some real heartburn over how that was handled on audit.

In the original post, that does not appear to be the motive. He is treating it like a SIMPLE, 3% of salary + 3% match, to all employees, but not funding it until the end of the year (it appears) so he did not have to deposit employee contributions each month, nor meet the requirement to fund every year, etc.

They were doing some convoluted bastardization of multiple retirement plans, none of which would stand muster under scrutiny. Best thing to do is collect a hefty retainer, start the amended process for all the payroll tax returns, issue the corrected W-2's and prepare for the onslaught of complaints from the ee's.

[Burke]

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??

Putting aside the problem of the issuance of such checks and whether they should have been taxable wages, can she not "recharacterize" the ROTH as a traditional IRA?

[Burke]

So in effect, they were evading the non-discrimination rules for pension plans. IRS might have had some real heartburn over how that was handled on audit.

In the original post, that does not appear to be the motive. He is treating it like a SIMPLE, 3% of salary + 3% match, to all employees, but not funding it until the end of the year (it appears) so he did not have to deposit employee contributions each month, nor meet the requirement to fund every year, etc.

[ruthc]

Agree with JoshinNC

Josh, I fully agree with you.
I worked for an entity that did not want to get into setting up retirement plans and only wanted to give to certain people's retirement. So the owners gave certain employees a separate check for whatever was agreed upon at their review. It was for a few management employees. Here is the difference. I received a PAYROLL CHECK for the amount and taxes were withheld from it. I had to set up an IRA whereever I wanted, but always had to submit proof to the owners that it was put into the IRA (not just any bank account). So I paid taxes on it.

[sea-tax]

Curduroy
Thanks for the kind words- I do come by once and a while a lurk and I do post when I have something to say
Usually all you smart people post before I have time to respond my brain just works a little slow.

Anyhow Traveling you are correct a simple IRa does not require a 5500. I got a little carried away with myself

Josh- glad to see you agree with me- having confirmation is always nice.

[JoshinNC]

Third

What is "tpa?"

Party Administrator.

[Burke]

All retirement plans and pension plans that I am aware of require some common things, plan documents, 5500, custodians and tpa.

What is "tpa?"

[JoshinNC]

What type of "pension plan"

is this? Money paid to an ee who then contributes the money to an individual retirement account (IRA or ROTH) is not a "pension plan", it's additional compensation paid to the ee and then they are voluntarily saving it for retirement (a SIMPLE kinda works that way, in that the ee has the right to choose any custodian they want to hold the funds, but the employer still deducts the deferred wages from total wages, diverts them to the chosen custodian, and directly makes a matching contribution, but this ain't what you've got going on). These are wages, pure and simple, reported as such by the employer and the employee. On the face, not only will the employer need to amend all payroll tax returns, but so will all the ee's when they received their corrected W-2's.

[Traveling EA]

Retirement Plan

I am in agreement with SeaTax - with the exception that a SIMPLE plan still requires a plan document, but no 5500's annually. At least that is my understanding.

[Corduroy Frog]

For Sea-Tax

I am glad to hear from you and wish you would join us more often.

I knew some of you would be uncomfortable with this arrangement, and I am as well. Will take your knowledge under advisement and approach the client.