JamesK

You may want to search for either Code section 411(a)(7)(C) or Treas. Reg. 1.411(a)-7(d)(4) to see if any secondary sources discuss the basis issue. In fact, I would discuss this with the participant. She would not want to pay tax twice on the same distributed amounts. On the other hand, the IRS would want you to make sure she has paid the tax at least once. My hazy recollection is that a friend of the firm repaid amounts to his employer's plan but they may have come from his own funds and were treated as after-tax amounts. So it may be possible since the Code and regulations don't appear to prohibit such a repayment.

I agree with the above comments - this seems to be a circumstance for which the abandoned plan program was designed. As for using the King case, I don't see its relevance. The issue there was whether income should have been recognized under the accrual basis of accounting in a year which was then closed under the statute of limitations. The critical difference was that the doctors in the King case filed tax returns triggering the commencement of the statute of limitations. Has the trust for the plan filed its tax returns? How about the revocable trust for years after the death of the husband? Another way of looking at it is to ask when a taxable transaction vis a vis the widow take place? The more likely scenario would be that the trust continues to be treated as tax exempt and that none of the beneficiaries are taxable until there is a distribution. IRC section 402. Different treatment might result if it is determined that the trust was disqualified at some earlier point in time but its hard to say that that would help. Since the trust presumably was not filing any returns, the statute of limitations presumably did not start to run. Thus, it's hard to see how this would work to your advantage. It is not unheard of to go amend a plan to bring it back into qualified status. Most practitioners would view this as providing the best result rather than filing tax returns for the trust for each open year. In short, I think it is just wishful thinking to ignore the separate existence of the trust - especially since the investment firm has a reporting obligation and seems to be holding your feet to the fire on following the terms of the plan and trust.

I have not researched this question at all but my gut reaction is that since our taxes are determined on an annual accounting basis (typically the calendar year for individuals), then you will have to go back to the year of death and issue corrected 1099s from then until 2016. If the beneficiary has been reporting the income all along, then it shouldn't be a big deal. Of course, there are probably a dozen other things that could have gone wrong that aren't covered in this question.

Similar situation but with an insurance contract plan. The sponsor filed Form 5500 disclosing the contribution which was necessary to fund the plan for the first year. For reasons not relevant to this discussion however, the plan was not "funded." We recommended that the sponsor file an amended return with "0" in all the relevant boxes along with a letter on the sponsor's letterhead explaining what happened. Since this was a one-off for our law firm, we never heard back from the client so I assume that that did the trick.