Payments from non-qualified plan should have been from qualified plan

[Guest ircreader]

Suppose a participant was paid $200,000 in benefits. $150,000 was from a non-qualified supplemental plan and $50,000 from a qualified defined benefit plan. If it was later discovered that the payment should have been $100,000 from the supplemental and $100,000 from the qualified plan, how would one go about correcting it?

Of course, the $150,000 from the supplemental plan would have been reported as ordinary income with employment tax withholdings; the $50,000 from the qualified plan would have been reported on a Form 1099R with no employment tax withholdings. So the participant/taxpayer would have had excess employment tax withholdings on $50,000. Could it be argued that the qualified plan has cut back accrued benefits? Could this also be considered a loan from the supplemental plan to qualfied plan? Any thoughts on how to fix this?

[mbozek]

You need to retain qualified tax counsel to resolve this. If the excess payment was made in 2004 the problem could be corrected simply by returning the excess 50k to the employer in 04 and then paying out the 50k from the Q plan. The refund will reduce the ee's taxable income. The employee should agree to this because the employer can reverse the FICA and income taxes, and the amt from the Q plan can be rolled over. However, the ret plan has a problem because it has a 50 k liability to the participant regardless of the overpayment in the NQ plan which cannot be offset by the excess payment. If the employee refuses to return the 50k the employer will have to pay out the 50k in the Q plan and then sue the ee for a refund of the 50k overpyament from the NQ plan.

[Guest ircreader]

Thanks mbozek. Do you think 50k could come from the Q plan with an assignment back to the employer based on Treas. Reg. sec. 1.401(a)-13©(2)(iii) or (iv)*? (Will involve tax counsel)

*(2) Specific arrangements not considered an assignment or alienation. —The terms “assignment” and “alienation” do not include, and paragraph (e) of this section does not apply to, the following arrangements:

(i) Any arrangement for the recovery of amounts described in section 4045(b) of the Employee Retirement Income Security Act of 1974, 88 Stat. 1027 (relating to the recapture of certain payments),

(ii) Any arrangement for the withholding of Federal, State or local tax from plan benefit payments,

(iii) Any arrangement for the recovery by the plan of overpayments of benefits previously made to a participant,

(iv) Any arrangement for the transfer of benefit rights from the plan to another plan, or (not sure what this means?)

(v) Any arrangement for the direct deposit of benefit payments to an account in a bank, savings and loan association or credit union, provided such arrangement is not part of an arrangement constituting an assignment or alienation. Thus, for example, such an arrangement could provide for the direct deposit of a participant's benefit payments to a bank account held by the participant and the participant's spouse as joint tenants.