Expert: Ed McFarland - 8/10/2006

Question
I'm a Professional Bookkeeper helping small businesses.  One of my clients rolled over IRA's into a Proft Sharing Plan & Trust (Defined Contribution Plan) and the money was received into a Trust checking account set up for this purpose.  The money was then transferred to an operating account to fund his new business. The result of this initial exchange was that the Plan became the majority stockholder in the new business, a C-Corporation. All of the business bank accounts were included in the bookkeeping setup because there is only one EIN Number and naturally the Plan was stated as owning the majority shares.  I'm not quite sure if I should be starting another set of books to monitor the activity in the Plan or whether this part is handled by the Plan Administrator who prepares the 5500.  Will the Plan Administrator, for instance be doing something with the original Trust checking account which now has a small amount of money left in it?  Will the business in funding the Plan, in effect be funding this Trust checking account?  I'm not quite sure where the bookkeeping begins and ends for the Plan or whether something is missing or incorrect in the bookkeeping setup.

Answer
Your problem now, based on the details you gave me, is that the plan is out of compliance with the Department of Labor. This type of transaction, taking the money out of the plan and investing it in a business is prohibitted. Go to www.dol.gov to learn more.

The only way that it could be clean is if it is a loan from the plan, but I doubt it got set up this way.

The Plan Administrator should be doing the recordkeeping, if not then the sponsor needs to do it.

Good luck