"Buy-Back" of Distributed Benefit

[Guest CJK]

IRC §411(a)(7)©, and the regulations thereunder, provide for the repayment of prior distributions by participants when they are re-hired. When this is done, previously forfeited amounts must be restored to the participant's account under the plan (assumes "buy-back" occurs timely). Are there any restrictions on the source of the repayment? Specifically, if the participant took a cash distribution and paid taxes on thje original distribution, the individual could repay the amounts with "after-tax" dollars that could come from any source of assets owned by the individual and this would then create a "basis" in the participant's account. If the individual "rolled-over" the original distribution, either to an IRA or another employer's qualified plan, and upon re-employment, elects to roll the original money back into the original employer's plan, can these funds be used as the "buy-back" that would trigger the restoration of the participant's previously forfeited balance, or are there restrictions on the source of the cash used for the "buy-back"?

[david shipp]

The regulations under §1.411(a)-7(d)(4)(iv) are silent with respect to the source of money used as a buyback contribution. The issue has been raised at least twice at ABA Employee Benefits Committee section meetings where the IRS has responded that after-tax buyback contributions are acceptable (and possibly considered the norm) and that the participant will have a basis in his account equal to the buyback amount. In 1996 the Service directly answered a question dealing with the use of conduit IRA assets to make the buyback contribution and responded as follows:

"Funds in a conduit IRA can be used to buyback benefits, but it is not mandated that conduit IRA funds be used. An employee can use other funds and therefore have basis in the buyback but such contribution would not have to be tested under 401(m) or 415. The employer may ask the employee if the funds are from an IRA in order to correctly treat the funds as basis or not."