Participant overpaid in plan termination/how to recover funds from ove

[Lynn Campbell]

Small DB Plan terminated with PBGC and all EEs paid off. Sole Shareholder was paid balance of Plan Trust after all other EEs paid off. Now one of the NHCE's checks has bounced and Trustee realizes that sole shareholder recd too much $, due to a miscalculation of the "balance in the trust" (because one check had not been cashed). All funds have been rolled to IRA's and there are no remaining funds in Plan and we owe the PVAB of $7,000 to 1 EE. Does anyone have experience in solving this - how to approach IRA custodian (insurance co) and how to approach overpaid HCE? Must they relinquish the excess funds by law?

[david rigby]

this is an admin. boo-boo. Seems perfectly reasonable to fix it so that the NHCE is not harmed. First order is to determine what should have happened, then to determine how much is required to fix it. As near as I can tell, the overpaid HCE has all of the money that belongs to the NHCE, but someone else might be at least partially at fault for the administrative problem. If the HCE is even partially responsible, then that EE has very little standing to say his IRA won't pay, in my opinion (actuary/consultant, not attorney). I don't think the identity of the IRA custodian is relevant.

If the HCE resists (likely), it is worth noting that he received too much. That is a status that should be corrected as well as the other EE's underpayment, esp. since the amount is clearly not trivial. If he got too much, then his rollover may be disqualified. Seems to me that corrected 1099's are appropriate, perhaps even mandatory, certainly advisable to document and too prove that no one is trying to hide anything. Good luck. Let us know what happens.

[Guest ERead]

Here's another thought on the disqualified rollover issue.

When (if you haven't already) you issue the 1099's for the distributions, have them reflect the correct distribution amounts, then any amount over that will be fully taxable to the participant in question - right? .... just another thought. That may be just the incentive you need to help them realize the ramification of not returning the money that legally, does not belong to them.

[Guest bswift]

had that problem recently for a client and its really a difficult question. The overpayment likely created a discrimination issue that impacts the plan's qualified status. The HCE must return the money or no one's rollover is effective. The other problem comes when the HCE does return the money, it should go back in the trust, which can distribute it out to the NHCE who can then rollover the amount to an IRA. If the money does not go back into the trust before it goes to the NHCE the IRS might get a little testy about the rollover. It is a somewhat serious problem and I hope that helps.