Late distribution

[DTH]

A DC plan participant signed retirement distribution paperwork before retirement. The plan administrator put the paperwork into the participant’s file until his retirement date. The plan administrator forgot to send in the retirement paperwork to the record keeper upon the retirement date. The distribution was finally made after 90 days and the investment funds lost over $30,000. The participant wants the loss put into his plan account because he wants to use favorable tax treatment. The employer would like to make a contribution to the plan to make the participant whole.

1. I assume the distribution was impermissible since it was paid after the 90 days. If the payment is reversed and reprocessed with new paperwork, the loss is even greater. I think the plan administrator can use the SCP program..

2. Can the employer make a non-deductible contribution to the plan to make the participant whole (i.e., replace the lost funds so the participant can use favorable tax treatment). I don’t think so unless the participant brings a fiduciary breach lawsuit against the plan administrator.

Please let me know your thoughts. Thanks!

[mbozek]

What kind of favorable tax tax treatment is this participant eligible for? 5 year averaging was repealed after 12/31/99 and only employees age 67 or older are eligible for 10 yr /cap gains treatment. The particpant would also need to meet the requirments for a lump sum distirbtion in order to take favorable tax treatment.

In order to determine the amount of the loss to the participant the plan document should be reviewed to determine what was the value on the date the distribution should have been made. If the participant has a been damaged by the late distribution payment because it is not in accordance with the terms of the plan then he/she should file a claim for benefits with the Plan admin. If the pa determines that the payment was due to a violation of the plan provisons then the PA can make a payment to participant from a suspense acount or the employer could make an additional contribution to settle the claim. The issue is whether the make up contribution would be considered an allocation subject to the 415 limits. The employer could always settle the claim by a payment outside of the plan provided the employee gives the necessary release and waivers against the plan. The employer needs to retain counsel to determine the options under the plan terms and whether an additional contribution would be deductible.

[Mary Kay Foss]

Apparently the retiree wants the loss made up in such a way that he can roll the benefits paid over to an IRA tax free. I don't think it can happen. Section 402 requires that amounts must be distributed by an employee's trust under 401(a) to be eligible for rollover. I can't see how a payment whether deductible or not could be made to the plan in order to satisfy this requirement.

When some employers were offering early retirement packages in the 90's they would often "sweeten the deal" for younger participants in a DB plan who hadn't earned a full pension by giving them a lump sum. Unfortunately, they couldn't roll it over even though they thought it was part of the retirement package.

[mbozek]

MK: Employers frequently give enhanced retirement benefits to participants in DB plans by increasing the accrued benefits for persons electing voluntary retirement ( 5 & 5) which is eligible for a rollover if paid from the plan. What you are thinking of are LS severance payments made by an er made under a voluntary retirment program which are not part of the DB accrued benefits. The issue is whether the er could make a contribution to the trust to make up the $30,000 loss to the participant and can the er take a deduction. The er must retain counsel to determine if it is doable but if the $30,000 is paid from the trustee for plan (and there are issues as to whether it would be an accrued benefit, violates the 415 limit or exclusive benefit rule, etc) then it is eligible for a rollover.

[mbozek]

The deduction of the employer contributions for restorative payments is governed by rev. Rule 2002-45 and PLR 200230044.