Distribution as a contribution

[Sully]

Anybody see a problem with an employer paying out a terminated participant with a company check and counting that distribution as a contribution?

The concern is that the money is not being run through the trust.

[Guest b2kates]

Yes, well stated that the funds were never company assets. Aguably could be considered a PT as a loan or extension of credit by a party in interest to the plan.

Bad practice, why not contribute to plan and have plan issue check?

Brett

[Guest merlin]

It's not a PT. See PTE 80-26. But I agree with your concern about the money not passing through the trust,and with b2kates's recommendation. Have your client get some kind of checkwriting capability for the plan.

[Belgarath]

The previous responses are right on - the plan should have a checking account! But, if the Trustee refuses, for some obtuse reason, to set up a checking account, then the employer could just write the check to the Trustee. This would qualify as a contribution, and the Trustee can then simply endorse the check over to the participant. Note, however, that this brings up additional potential problems if it is over $200.00, because you then have mandatory withholding. So unless it is a direct rollover where the Trustee can endorse directly to the new custodian, this approach won't work.