Repayment of Distribution & Forfeiture Restoration

[Guest Suanne]

A Participant terminates employment and takes a cash distribution of his vested portion. 20% is withheld as Federal Income Tax, and the participant receives a 1099 for the distribution. The participant is rehired, and wants to pay back the distribution to have the forfeiture reinstated. Since the participant has already been taxed on the distributed amount, is the repayment now considered after-tax money and has to be carried as a basis?

[Blinky the 3-eyed Fish]

Ah, I found someone with the same question. Does anyone know the answer?

[QDROphile]

Yes.

[david rigby]

Funny, but really not appropriate for this venue.

[QDROphile]

Yes. The repayment amounts are after tax and create basis.

[Blinky the 3-eyed Fish]

Hypothetically, what if the participant rolled over the distribution originally and then repayed the plan back from those dollars. That would seem okay in my mind and of course there would be no basis. Agree?

If the participant took the cash originally but had a separate IRA from which money was rolled over into the plan (assuming the plan allowed for rollovers), do think that could count as a repayment?

This is the first time I have encountered this, so I might as well know all the nuances.

[KJohnson]

I agree with the first. I don't know about the second. I think there was a long discussion about this a few years back on the Boards but I could not find it. I think there was also a Q&A with the IRS at the ASPA conference back in '96. There is a reference to that Q&A in this link:

http://benefitslink.com/boards/index.php?s...t=0entry36478

I previoulsy thought that this puts an unrealistic burden on the plan administrator. How do they know the source of the IRA contributions (pre-tax or post-tax) or whether it was an "old style" conduit IRA? Of course now these are the same questions that you have to ask post-EGTRRA if someone wants to roll their IRA into a plan.