Ineligible Distribution

[Guest Amanda Davis]

I'm the plan sponsor and have just been notified that a participant, who is still considered an "active employee" as per the Plan, has taken a distribution. In-service distributions are not allowed, per the Plan.

She took part of the account in cash and rolled the other part into an IRA. In doing this, she defaulted a loan that we are still withholding payments for (we didn't know she took the distribution).

Even though this distribution happened last week, she has already cashed the check for the portion that she opted to receive in cash.

What is the appropriate correction here?

[jaemmons]

I would first attempt to get the money back from the participant for the cash portion. Next, I would have whomever is listed as the trustee to the plan contact the IRA custodian and let them know that they had accepted an ineligible rollover and as such those amounts need to be returned to the trust. Finally, I would have the trustee contact the TPA/and or recordkeeper to have the loan restored to the participant's account, as it should not have been offset, since the participant did not incur a distributable event.

Who authorized the distribution?? Obviously, there is some liability here but you need to determine where.

[Guest Amanda Davis]

Her employment status was incorrect (shown as terminated) at the recordkeeper and we didn't know it. Status is ultimately sent by the Plan Sponsor (me), but she slipped through as a term.

We have paperless distributions and the recordkeeper saw the termed status and just let the money out of the Plan.

[Appleby]

Jaemmons, the IRA custodian cannot disburse assets from the IRA without written permission from the IRA holder . Instead of contacting the IRA trustee/custodian, the plan administrator must work with the IRA owner to have the assets distributed from the IRA and returned to the plan… since the assets are considered ineligible rollover assets, the distribution should be done as a ‘return of excess contribution”, which will not be treated as taxable income, except for any earnings.

[jaemmons]

Assets of this nature which are ineligible to be transferred to another qualified plan, including IRA accounts are not technically "owned" by the employee but by the plan's trust. The participant does not obtain any right to those benefits ("own")until a distribution event occurs. I agree that they should work with the employee to obtain the funds from the IRA, but the trust is the rightful "owner", regardless of the assets being earmarked in an individual account for the participant, and as such can the plan's trustee should be able to work with the IRA custodian/trustee to have those ineligible assets returned, if the employee does not cooperate.

[Guest Amanda Davis]

Thanks for all of your input.

Luckily, our plan recordkeeper/trustee is the same as the IRA. The participant is also being cooperative and is going to send a check for the $12000 distribution that she received in cash.

I just wanted to make sure that once we've identified all sources of cash that we handle it correctly and return it to our plan intact.

Do you know what we should do to account for market adjustments in the 2 week gap between the distribution and the reinstatement of the funds?

[Appleby]

If the IRA owner refuses to cooperate, then the plan has the option to take the matter to court. There have been such instances where the participant refused to reimburse the plan... the plan sued the participant and won. Surely if it was an option the plan would be better served to work with the IRA custodian?