Tax status of forfeiture buyback

[Guest GMedley]

If an employee terminates, is paid out & forfeits a portion of his/her company match, and then returns to the company with in 5 years, our plans give him the option to "buy back" that forfeited amount, using his own money.

It would seem to us that that buyback is then after tax money, & would not be taxed again upon distribution.

I'm having a hard time substantiating that. Is anyone able to confirm that (or refute?) References to IRS code appreciated.

thanks.

Grant

[david rigby]

There are a number of earlier discussion threads that might help.

http://www.benefitslink.com/boards/index.php?showtopic=7890

http://www.benefitslink.com/boards/index.php?showtopic=9005

You might also do a search on the Message Boards using "buy-back" or "repayment" as a search criteria.

[Guest GMedley]

One of these threads seems to infer that even though the buyback is made with aftertax dollars, they are still taxed upon eventual distribution. Is that your understanding?

[Alf]

Yes. I think that the distributions have to be taxed. The individual took an intitial distribuiton that was probably rolled over to an IRA. These IRAs are still in place when other funds are used for the buyback. If the buyback funds were not taxed on distribution, the individual would be getting twice the tax deferral, wouldn't they?

[QDROphile]

If after tax money is used to qualify for restoration of forfeitures, it is not taxed on distribution.

If the plan allows IRA rollover funds to qualify for restoration, the rollover money will be subject to tax on distribution.

In response to Alf, the money that originated in the plan and is still in the IRA will be taxed on distriution from the IRA, so no pre-tax money escapes taxation. If the buyback money is taxed, there would be double taxation. I can think of one example of double taxation --- failure to remove excess deferrals in time --- but that is an express penalty circumstance. The general rule is that income is taxed only once.

[wmyer]

"I can think of one example of double taxation -- failure to remove excess deferrals in time -- but that is an express penalty circumstance. The general rule is that income is taxed only once."

Well, an instance of double taxation, in addition to what QDROphile named, is taxation of loan interest payments upon distribution. Loan interest is paid with post-tax money but taxed again upon distribution.

[Guest BL333]

Resurrecting this post. So is the consensus that after-tax money used to buy back forfeitures would be kept in an after-tax account and would NOT be taxed again at distribution?

Many thanks!

[masteff]

This looks to be the best answer of those above.

If after tax money is used to qualify for restoration of forfeitures, it is not taxed on distribution.

If the plan allows IRA rollover funds to qualify for restoration, the rollover money will be subject to tax on distribution.