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In Service Distribution prior to 59-1/2


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We have a Plan that allows for in-service distributions once a participant has achieved 10 years of service, at any age.  Plan contribution sources are 401(k), Employer non safe harbor contributions, and Participant Rollovers.

A participant who was under the age of 59-1/2 has received all of his employer and rollover monies and also some 401(k) monies which are restricted.  Under EPCRS the correction is to take reasonable steps to secure repayment of the excess amount.  We are assuming the participant does not have the capacity to return the funds.  In that case, as the over payment to the participant was a premature distribution the employer is not required to make up the difference.

It appears upon our initial review that a VCP filing will be necessary (and self correction not available).

I would be very much in appreciation if anyone has any comments or thoughts.

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I believe you treat it as an overpayment under EPCRS.  I think the conservative approach is to return the funds (including earnings) to the plan whether by the participant or the employer (assuming that it is a recovery of more than a small amount).  I believe a reasonable attempt needs to first be made to recover from the participant.  If by participant, then it goes back into their account.  If by the employer, then it goes into suspense to reduce future employer contributions.  I recall reading informal comments from the IRS that they do not believe the employer has to return the funds in a case like this, but I have never came across anything formal and it is counter to the approach in EPCRS.  I've also read comments that the IRS needs to clarify in EPCRS that a return of funds by the employer is not needed in this case because it is too punitive for the employer who does not otherwise make employer contributions to the plan and is meaningless to the ones that do as it just reduces future amounts.  I know they made some clarifications to overpayments in 2016-51, but I don't believe anything was clarified with this particular issue.

Whether or not it would be filed under VCP would depend if it is outside the window to self-correct if so, an analysis of the facts and circumstances as the whether or not it is a significant issue. 

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1 hour ago, Madison71 said:

... I recall reading informal comments from the IRS that they do not believe the employer has to return the funds in a case like this, but I have never came across anything formal and it is counter to the approach in EPCRS. ...

It's in the current EPCRS Rev. Proc., just a little hard to find.  (Emphasis added)

Quote

Rev. Proc. 2016-51, 6.06(4)(b) Make-whole contribution. To the extent the amount of an Overpayment adjusted for Earnings at the plan's earnings rate is not repaid to the plan, the employer or another person must contribute the difference to the plan. The preceding sentence does not apply when the failure arose solely because a payment was made from the plan to a participant or beneficiary in the absence of a distributable event (but was otherwise determined in accordance with the terms of the plan (for example, an impermissible in-service distribution)).

 

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You haven't said when this happened.  If it was within the allowable SCP correction period in Section 9.02 of the Rev. Proc. for significant failures, then you can skip the determination of significant/insignificant and use SCP.  If not, then you need to determine whether the failure is insignificant under Section 8.02 to see if you qualify for SCP, of if you need to use VCP. 

The correction methods in the Rev. Proc. are pre-approved.  See 3.01 and 6.02(2).  If they are eligible for SCP, but want written confirmation from the IRS that the correction is appropriate, then they can file under VCP.

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  • 1 year later...
On ‎7‎/‎20‎/‎2018 at 2:57 PM, Kevin C said:

It's in the current EPCRS Rev. Proc., just a little hard to find.  (Emphasis added)

Rev. Proc. 2016-51, 6.06(4)(b) Make-whole contribution. To the extent the amount of an Overpayment adjusted for Earnings at the plan's earnings rate is not repaid to the plan, the employer or another person must contribute the difference to the plan. The preceding sentence does not apply when the failure arose solely because a payment was made from the plan to a participant or beneficiary in the absence of a distributable event (but was otherwise determined in accordance with the terms of the plan (for example, an impermissible in-service distribution)).

Participant A is actively employed and receives an in-service distribution in an amount that he/she was not entitled to receive due to a vesting error.  The funds received were rightfully allocated to the participant's account but the amount distributed exceeded the accrued vested percentage at the time of distribution.  All other terms of the plan were followed in processing the distribution.

The bold text states that if a payment was made to a participant in the absence of a distributable event but was otherwise entitled to receive the funds - then the make whole requirement doesn't apply. 

Would an overpayment made to a participant which exceeded the portion of the account to which he/she was vested be considered an overpayment that qualifies for the exception to the make whole requirement? The participant was entitled to receive the funds distributed, but received the funds too early due to a vesting error.   

It's nice to be important, but it's more important to be nice...

CPFA, CPC, QPA, QKA, ERPA, APA

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