Incorrect Distribution - Participant Still Employed

[Guest UKH]

Facts: Mr. X was terminated as of 1/1/02. He requests his distribution. In the mean time he is hired again on a part time basis. The distribution is still processed without the knowledge that he has been rehired. The distribution is over $5,000 and was rolled over to an IRA.

How do you correct the failure since the distribution should not have taken place in the first place?

My feeling is that the person needs to roll the money back into the plan since the rollover is not qualified. However we all know that the participant is not going to do that. In that case what other options do we have in order to fix the operational failure? If anybody has had to deal with a similar situation your input will be highly appreciated.

Thanks!

[mbozek]

There are two ways to look at this:

1. employee was entitled to receive a lump sum under the terms of the plan and plan adm. could not refuse his request for LSD under ERISA. Therefore payment was not improper even though ee was rehired because there was no discretion to say no. Need to read plan to determine when distribution is required to be paid. Remember this is an audit matter and plan only needs an audit position from counsel.

2. Treat the payment as an impermissbile distribution because the emplyee was rehired. The Employer would have to request that ee return the distribution and state that the failure to return the distribution will result in sanctions including termination of employment. Since the employment lawyers will not allow the use of disciplinary action to force a return of the distribution I think you know what option should be chosen.

[Guest And another thing ...]

Contact the IRA custodian, say the rollover was not proper and ask that they transfer it back to the plan. If it is not transferred back, tell them that money is not qualified. Inform the participant of the same and add that, if the distribution is not transferred back, a 1099 (a corrected 1099 if one has already been issued) showing the entire amount as taxable will be issued.

[jpod]

Two further thoughts:

1. If the employee went immediately from full-time to part-time, or if there was an agreement to rehire the employee shortly after he "terminated," there was no bona fide severance from employment/termination of employment/separation from service (or whatever you wish to call it). Therefore, unless the employee was 59-1/2 at the time of the distribution (and the plan provides for in-service distributions), the previous posters' suggestions are worthy of serious consideration.

2. If the termination was bona fide, I suspect that you may not have an operational violation, unless the plan provides that you cannot receive a distribution if you are rehired prior to the distribution.

[mbozek]

Before you take the advice in the last post better consult with counsel to see how many liability issues the Plan Admin will have incurred including:

1. breach of fid duty in making incorrect payment:

2. violating the terms of the plan in demanding a return because the participant was entitled to a distribution because of terminaton of employment.

3. negligently causing a taxpayer to incur taxation based upon an incorrect interpretation of the tax law-- the PA had better be able to prove that rehire prevents a LSD under the distribution rules -- I dont think counsel would be too comforatable with defending that position.

Also in order to get the attention of the IRA custodian I think the PA would be required to write a highly detailed letter of incriminating action by the PA which would be legal proof of violations of 1,2 and 3 above.

This is not a case where the PA is on solid grounds to take aggressive action

[Appleby]

Regarding contacting the IRA custodian to have the assets returned to the plan- The IRA custodian is not permitted to make a distribution form the IRA without written authorization from the IRA owner. Furthermore, any ineligible rollover to an IRA must be corrected as a ‘return of excess contribution’.

[david rigby]

If the EE is over NRA, then the plan can pay distribution without requirement of severance of employment, but the plan has to specify this.

[Belgarath]

Most of the plans I've seen define a termination of employment as a "Distributable Event." Although subsequent reemployment may prevent a break in service, these plans generally do allow the distribution in the situation you've described.

Does the plan involved specifically prohibit a distribution in this situation? If not, then I wouldn't think there is any problem.

[Guest UKH]

Apparently the document does not support any distributions except in case of death, termination of employment & disability. The plan does not even allow in-service distributions or distributions at NRA. Hence we do have a problem. However thanks for all the responses.