Distribution in 2002 paid from company account

[Jim Chad]

In Spring of 2002 a distibution ( aobut $11,500) was made. This emmployer had a seperate company account using the same 3 mutual funds as the 401(k). He made the distribution from the company account. The accounts have different EIN's and I'm concerned that moving the money from the 401(k) to the employer account would be a prohibited transaction.

Does anyone have any thoughts on this?

[E as in ERISA]

Yes. That would be a loan from the employer to the plan. Even if its interest free, it probably needs to meet the requirements of PTE 80-26.

[FundeK]

Sounds to me like the prohibited transaction has already occurred (the employer paying the benefits from their own account is the loan from the employer to the plan). Distributing the funds from the 401(k) would correct the prohibited transaction right?

[Guest pjb]

It would seem to me the only approach is to have the employee return the money and then issue another check from the trust. I don't see a PT yet. I agree a transfer would be a PT, but the PT to me would be an improper use of plan assets for the benefit of the disqualified person (the employer). The employer simply overpaid the employee and is looking to the plan to get reimbursed. Even if one could argue a way around the PT, you have timing issues such as eligible rollover notice and transfer timing. If the amount was rolled over to an IRA, I think you're going to have to reverse the rollover and deal with the possible taxes and excise taxes due to the improper rollover. If it was not rolled, how was tax withholding processed; was it included as W2 income?

[Jim Chad]

The distribution was in cash with 20% withheld. It was reported on a 1099r. The employee has spent the money and it cannot be recovered.

[Guest pjb]

Then perhaps encourage the employee to take a distribution from the plan directly to pay for the return. I don't know if the employee could get reimbursed for the withholding back from the overpayment on his next 1040. I'm also not sure if there are any consequences to misreporting the income.

[david rigby]

Ridiculous. The employee did nothing wrong. If the 1099R was issued with the plan's EIN, the employee has no knowledge of anything wrong. The plan and employer should take care of this.