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then required to advise the sponsor of the existence of the CAP
Program and the possibility of using a closing agreement to avoid
plan disqualification. In addition to retroactive and
prospective correction of the plan under the CAP Program, the
party or parties to the closing agreement must agree to make a
nondeductible payment to the U.S. Treasury in order to avoid
having the plan’s qualified status revoked. The maximum amount
to be paid under the CAP Program equals the total tax resulting
from (1) the disallowance of the plan sponsor’s deduction for
contributions to the plan, (2) the treatment of the plan’s trust
income as taxable income, and (3) the inclusion, in the gross
income of the participants, of their appropriate shares of plan
contributions as determined under the facts of the case.
The EP agent in the instant case, who audited the Plan and
subsequently recommended and obtained its disqualification, did
not notify Ace or the Plan trustee of the CAP Program, did not
discuss the CAP Program with Ace or the Plan trustee, and did not
provide either with the option to utilize the program as an
alternative to the Plan’s disqualification. During examination
of the Plan, no significant operational defects existed that
would have prohibited the use of a closing agreement under the
terms of the CAP Program.
There is no dispute in the instant case that Ace failed to
make amendments to the Plan in order to comply with changes in
the law resulting from TEFRA, DEFRA, and REA. Thus, there is no
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Last modified: May 25, 2011