Improperly Titled Self-Directed IRA
I have a client that had the option of self-directing assets from his firm’s qualified plan (money purchase pension plan). While working with another advisor he directed that some assets be moved into a self-directed IRA for a private placement real estate deal and some assets be held in a separate IRA with a variable annuity company. At the time of the transactions, the client was under age 55 and still employed by the firm (he still is to this day).
The plan document states that non-hardship in-service withdrawals may take place after age 59 1/2, and therefore it looks like these transactions violated the plan document. The record keeper on the plan is telling us that both self-directed IRAs should be titled as owned by the firm’s qualified plan rather than as a client owned IRA.
So, three questions:
1. Is the record keeper correct in stating that these should be titled as plan ownership?
2. If so, what recourse does the client have in getting these adjusted back to plan ownership?
3. Are there, or have there been circumstances where, IRS penalties have been levied for this type of issue?
Thanks for your help!
Scott
Permalink Submitted by Alan Spross on Wed, 2011-01-26 02:53
The plan no longer has control of the assets, so their problem depends in large degree on how cooperative the client wishes to be. Since he is still employed, it could be an awkward situation. Even if he were willing to transfer the IRA assets back to the plan, there could be several issues and costs involved in disposing of the particular assets in his IRAs, ie converting the IRAs to cash prior to transfer back to the plan.
There are several self corrective measures available to plans that commit operational errors under EPCRS. I was unable to find info for this particular type of error. Any penalties incurred here should be levied against the plan, not the client. Has the plan administrator been in touch with the IRS regarding correction options or sanctions against the plan?
Permalink Submitted by Scott Cousino on Thu, 2011-01-27 14:43
Alan,
Thank you for sharing your wisdom! The plan administrator has not been in touch with the IRS regarding correction options. We are working with the current self-directed IRA custodian and VA company to see if they will retitle the account back to plan ownership. I’m expecting a letter of indemnity from the plan administrator will be required. As you mentioned there may be some cost impact, but we would expect that would be less than the impact of a potential penalty if discovered in plan audit. Thanks again!