OFAC blocking a distribution

[Kevin C]

We had a terminated participant's distribution get flagged by OFAC and received a request for additional information before the distribution could be paid. That's never been a problem before, but this participant stopped responding to e-mails, the phone number she used while employed is no longer working and no one who worked with her knows where she is. The bank holding the funds is now proceeding with their blocking procedure for this payment.  She will have to prove to the government that she is not on their restricted list to get her funds.   Question is, does this affect the 1099-R reporting? She elected a direct distribution and the 20% withholding was deposited.   The blocked amount is the net payment.  Has anyone dealt with this before?

[ETA Consulting LLC]

If you ask a question, then it must be a good one

I'm thinking that it could go either way.  On one hand, there is precedent that suggests a distribution from the plan is complete once the checks have been mailed.  This would mean that the Form 1099R reporting would proceed as distributed, but the check would remain on the outstanding check log for the plan.  Hence, the transaction would be complete (for plan purposes) with the net check remaining in limbo.

Another approach would be to reverse (and redeposit) the check and merely net the 20% withholding against future withholding amounts.  The 945 account will balance at the end of the year.

These are merely my 'thoughts'; which is to try and keep the plan as neutral as possible.  Honestly, if I were to ever encounter something like this, I would probably reach out to you through PM to seek your advice

[Belgarath]

No idea - just for those, like me, who didn't know what OFAC is, it stands for Office of Foreign Asset Control. Under the U.S. Treasury.

[CuseFan]

I believe ETA's second approach is the right way to go. I also believe the DOL position would be the transaction is not "complete", that the participant has not been paid, and that the funds are still plan assets which must be restored to the participant's account until such time as they can be paid.

[Kevin C]

This one was supposed to be a direct deposit, but it's being blocked by the bank the custodian uses to make the payments.  We've had distribution checks flagged before and they won't send the check until the hold is lifted.  So, it's more like the check was requested and possibly written, but not mailed.  The distribution can't be reversed.  The bank holding the funds will not send them back to the plan.  I don't know what happens to the funds, but I would expect them to end up at Treasury.

 

This is the 6th payment we've had flagged this year.  The information they ask for varies by person, but it's usually one or more of the following: full name, address, date and place of birth, nationality, citizenship, employer's full name and address and detailed purpose of payment.  Sometimes, they also ask if the person ever lived in a certain country.  When the participant provides the requested information, the bank releases the payment.  

[BG5150]

If you can't find her now, then mailing the check certainly won't help.

[david rigby]

21 hours ago, Kevin C said:

The bank holding the funds will not send them back to the plan.  I don't know what happens to the funds, but I would expect them to end up at Treasury.

If so, then maybe you could send the 1099-R to the Treasury. 

Oh never mind, they don't pay taxes.

[CuseFan]

Wow, what business is the plan sponsor in? Wait, don't tell me, I don't want to turn up missing like the participant!

[jpod]

I would say it's a distribution and sleep fine at night.  Where is the harm to the plan in taking that conservative position?  If the issue is cleared up and the funds are released but too late for the participant to do a 60-day manual rollover (assuming she wishes to do that), this would seem like an easy case for one of those IRS waivers of the 60-day period.   

[Kevin C]

It's a chain of pawn shops.  But, we have participants in other plans that get flagged, too.  I don't think she is missing, she just doesn't want to respond.  It's a shame, because if she had provided the information they requested, she almost certainly would have received her money. So far, everyone else has provided the requested information and had their funds released.  If she won't provide information to us, I doubt she would go to the government and give them the info.

 

jpod, that's the direction we are leaning.  If she does ever get the funds from the government, I don't see them issuing a 1099-R.  But, I think the most likely outcome is that she won't ever get the money.