Reporting for Errant Distribution

[mming]

A trustee paid a participant his fully vested account balance from their PSP even though the participant is still employed, hasn't yet attained NRA and in-service distributions are not allowed. This occurred because the participant is trying to buy his first house and his accountant informed him that if he transfers the money first to an IRA he could pull the money out of there and avoid the premature distribution excise penalty.

I seem to recall hearing about the IRA/first home thing but I'm not sure how to report this on the PS side. Looking at 412©(4), an eligible rollover distribution is defined as all distributions except the several that are listed. I have to think that the section is only discussing distributions due to valid distributable events and a distribution that should never have been made could not be allowed to be rolled over. If this is true and a 1099-R is needed for the distribution, it should be shown as a taxable distribution even if it somehow ended up in an IRA. I'm also guessing that a schedule R would be needed for the Form 5500 (there were no other distributions).

Is this the best way to handle this? All help is appreciated.

[Earl]

I think I would advise the client to adopt an in-service provision effective back before the distribution as a correction and document it as such. (And passing out a new SPD, rather than an SMM, would mean no one would even know it was a new provision). Probably should file and pay a sanction but I know 90% of my clients would say screw it.

I occasionally get asked about audit frequency. I tell them I do 500 plans (small Plans) and have had less than 10 audits total in the last 5 years. And no auditor ever found anything. Is this a typical ratio?

[Appleby]

Regarding the question of reporting and rollover eligibility, the assets are rollover eligible unless they fall under on the of list of non-rollover distributions. The Code does not address whether the distributions are due to a triggering event, only the type of distribution in determining the rollover eligibility of assets. As long as the distributed assets are not due to any of those on the lists, then they are rollover eligible… we can only assume that Congress assumed that distributions would not occur from plans unless there was a triggering event.

If the assets were distributed directly to the IRA, then it should be reported as a direct rollover (Code ‘G’ on the 1099-R- reportable but not taxable)

Can’t address how it will affect the plan qualification issue…Maybe Earl’s way would solve that …assuming the client is never found out…

I wonder why the accountant made such a recommendation…maybe the plan does not offer loans? Because if it did, it may have been a better choice to take a loan from the plan, as the assets would continue to earn tax deferred growth, the interest repayments would be made to the participant’s account, and quiet likely (or hopefully) the assets would be taxed at a time when the participant was in a lower tax bracket, i.e. .at retirement

[Lynn Campbell]

I cannot help mentioning this: a couple years ago when I had an IRS audit, the auditor mentioned that HE read Benefits Link message boards etc.