Bird

It sounds like what should have happened is that the stock should have been transferred in kind* to the bene, and it sounds like that didn't happen. If you could get the custodian to do that now, you'd be back in the position that you should have been in and everything would be fine. But I doubt that the custodian will be willing to make a distribution without issuing a 1099-R for ordinary income. I guess you can point out to them that they should have processed the RMD years ago but I don't know if that will help. *But I'm not sure that you can do an in-kind distribution to satisfy RMDs.

I agree with Appleby (yes, I thought this was qualified plan money based on the forum placement and language used). fiddler, some investment companies use the term "beneficiary payout" IRA. If you run into any roadblocks from companies telling you that you can't do this, try that terminology and that might ring a magic bell.

It sounds like your client is the bene of a plan, and the plan happens to have invested the participant's money in an annuity. If the money is taken in 2006, your client has no choice but to take it as a taxable distribution. If she waits until 2007 (new law), she can roll it to an inherited IRA in the name of the participant and then take systematic distributions over the participant's life expectancy. I'd guess that the annuity will simply pay a death benefit to the plan which will act as a conduit for your client.

The original post said it wouldn't have a return for 5 years, not that it may or may not...I take that to mean no dividends or interest and yes, I might invest in it if I thought there was a probability of a high return at some future date, even if no annual returns for a period of years. Having said that, I'd not want this in a plan if for not other reason than valuation problems. It should be independently appraised to get a true value each year; usually when I explain that the client loses interest. The smaller the percentage of the total assets, the more practical it is; it might be borderline practical/prudent in this size plan but then I'd also tell the client I'd have to charge more for the hassle factor. I wouldn't change to self-direction either. Unless you're going to offer it to everyone (have fun with that) I don't see how it's not discriminatory if the owner is the only one able to get a piece.

I wouldn't mess around with the options offered under the plan. If someone wants an option from Insurer I that's not one of the plan options, then they can just do an IRA rollover to I and take the annuity from the IRA. Are you saying that an annuity has actually been elected, ever?

progressivejoe- You're probably the resident expert on this topic, based on the depth of your replies. Very interesting and thanks for the education. I don't know for sure, but I'd guess, as it seems you are, that the fact that the tax debt arose from a qualified plan loan default does NOT necessarily taint the remaining plan account and subject the bene to an IRS levy.

I've never reported any bonds here. Not sure what a "securities loan" is either.

Under present law, no rollover to non-spouse bene. In 2007, they could roll to an inherited IRA. If the participant was already receiving RMDs, then I believe the general rule is that they must continue at least as rapidly. I don't think the 5 year rule applies in this situation. The plan may or may not allow the continuation of RMDs vs. the forceout in a lump sum. Seems to me they should have been given option election forms limiting them to the choices permitted.

It's an IRA, thus subject to IRA rules.

That's a good question, and I think your earlier comments were even better, because they tend to lead one to the correct conclusion - the 2004 contribution was discretionary, it wasn't made, and it's too late to make it now. Some things you can't fix. The benefit statements should be re-done.

They might have a trust set up as part of the will and want the payouts to be handled as per the trust provisions. It's not a great idea for the reasons mentioned above. But yes, they can do it.

That's an interesting question. My clients (generally small business owners who are also the trustees and have most of the assets in the plan) might ask "Why would I want to get this fidelity bond? I'm not going to steal my own money!" Yes, I make them get it.

This link may or may not be open to ASPPA non-members: bill Yes, I think they're off by a year.

Unless I missed it, the original post just said that the plan was completely paid out in 2006. To "terminate" in my book is to adopt some documentation saying the plan is terminated. Maybe your cessation of accrual documentation was close enough? (I'm not quite sure what cessation of benefit accruals means anyway in a 401(k) plan.) Thinking about it a bit more, a plan can be deemed to be terminated - cessation of substantial and recurring contributions, e.g., and I guess your "cessation of benefit accruals" might qualify; maybe that's stretching it, maybe not...

Good point. This is NOT something to be meekly accepted "because the payroll company says so."

Appleby, I think that's correct.

So an owner making $1,000,000 can't make a 3% pro rata contribution and get a $30,000 allocation. Likewise, for testing, a $15,000 deferral would only be 1.5%, and Congress thinks that's not fair. It has nothing to do with limiting deferrals once someone has reached a certain threshold. Well, as noted, it's possible that a plan could be written that poorly, but fortunately I've never seen it.

You didn't say when the plan was actually terminated. If it was in 2005, then I'd say those with no accounts were effectively paid out and ceased to participate. Otherwise, I'd say they were still participants in 2006.

pax, the rollover chart is interesting but has nothing to do with this thread, does it? In fact it appears to reflect pre-PPA law. (Not complaining, just a little confused.)

OK, I get it - interesting..."too cute by half" comes to mind. I agree that proper treatment is for them to be PS contributions. Going back to fix prior years would certainly be ugly.

My recollection of that case is that the DOL told him to get a bond and he refused, so they took him to court. My experience with IRS audits and what I've heard from others is that they simply tell you to get a bond. Of course it's not an IRS issue. The non-qualifying assets/audit issue is where there really is, effectively, a penalty.

Just out of curiousity, how do you pre-pay deferrals from a salaried employee, if they are withheld from pay? I can see withholding in error before the plan is established; is there some other (practical) scenario?

I think you have it correct, except that the new law "fixes" a couple of other "problems." First, not all plans permit lifetime payouts, i.e. lump sums only for death benefits, so your bene (under those conditions, under old law) would have been required to take a lump sum within 5 years. Second, even if the plan permits stretched-out payments, the bene might not like the investments and/or the trustee might not want the responsibility. (Think of two dentists in partnership, each with significant benefits, one dies, naming a trust as beneficiary. That money is (was) stuck in the plan, and if the surviving dentist was the trustee, and it's a pooled account, no one will be happy.) The new law takes care of that situation. Finally, consider the same facts, but everyone is happy, except now the surviving dentist closes the business, merges with another practice, dies, whatever and the plan is terminated. Those stretched out payments, so carefully drafted by the estate planning attorney, now are out the window since the plan is being shut down.

I'm not sure. I can see tracking of the 5 year rule being problematic. I'd guess the IRS will have to issue some regs on this.

If I understand your situation correctly, the new law didn't change anything. The new law just allows non-spouse beneficiaries to establish an inherited IRA for a qualified plan distribution. A non-spouse beneficiary can not do a rollover into his or her own IRA under new or old law. The general rule for death before the owner's required beginning date is that distributions must either begin by the end of the year following death, over the beneficiary's life expectancy, or must be taken out completely within 5 years. I think that fits the situation you're describing.