Terminated participant receives lump sum payout and now wants to retur

[Guest michaelv]

A Plan participant terminates employment and completes all required paperwork necessary to get her distribution as a lump sum. She had a $12,000+ loan at the time of her termination and decided to not pay it off. Trustee cuts her the check and mails it to her.

She receives the check and it dawns on her how much she loses in taxes. She has not done anything with the check.

She now wants to send the check back to the employer (over $5,000) and also came up with the money to pay off her loan. She wants to send that check in too.

Can she do either of these? Is it up to the Plan administrator to decide whether or not to accept either?

Thanks for any comments.

[Guest Karen Geiger]

Because the participant has received the check, she is in constructive receipt of the funds. This is because there is nothing to prevent her from cashing the check now. Accordingly, she will be taxed on the distribution regardless of whether she returns the funds to the Plan.

[Disco Stu]

I agree with the previous post regarding constructive receipt and taxability. I don't think the distributing plan can take it back.

In addition, if this participant wants to avoid taxes on the distribution (including the loan) all she needs to do is roll it to an IRA or another qualified plan.

There is still a 60 day window in which a taxable distribution can be rolled over. Assuming that the loan was not previously a deemed distribution, it too can be rolled over.

[Alan Simpson]

She could also place into the IRA the amount of taxes that was withheld from the distribution.

[david rigby]

Hmmm, I wonder if the plan *could* take it back, plan provisions and/or admininstrative practice being the guide, but is there anything that would prohibit that? (It seems unlikely that the plan would want to tackle this if we have crossed over December 31.)

A different wrinkle might be if the EE has been rehired, perhaps somewhere in the controlled group, could the plan have provisions that permitted the dsitribution to be reversed? especially if the rehire actually occurred before the date of the check?

[Guest michaelv]

Thanks for the replys. I think the loan has already been considered a deemed distribution, so there might be little left to do with that.

I think the trustee would like to help her out and thats why this came up. However, the 20% in taxes have already been withdrawn out of the plan and paid for taxes. That to me sounds a little messy if they want to get that back.

Rest of the story (ala Paul Harvey)....so where did she get the $12,000+ so quickly to pay off the loan? Her husband, who is a participant in the same plan, took a loan for that amount from his account to pay it off. All in the family.

[Guest hank]

A technical point: since she actually had the check in hand, she was in "actual" receipt rather than constructive receipt. The analysis otherwise is right on, and she should do the IRA rollover to avoid current taxation.