Buy-back of forfeitures question

[Brian Gallagher]

A guy rolled over to an IRA $25,000, of which $12,000 was employer money (match & P/S), and forfeited $5,000.

He may be rehired w/in 5 yrs. Plan has buy-back provision, doc says to restore forfs, he must pay back ER portion.

How does he go about that? Does he write us a check for the $12k? Does he have to remove it from his IRA?

If he writes a check, won't that money be taxed twice, then?

If he removes from IRA, what kind of transaction is it? Transfer? Rollover?

Would he have to amend his taxes? (original distrib was 4 yrs ago).

Any help would be appreciated.

[KJohnson]

Here is the IRS response to a question on this issue from the 1996 ABA Joint Committee on Employee Benefits "Meeting with Agencies" Q&As. In the question, the participant had rolled a plan distribution over to a conduit IRA and was subsequently rehired and was going to repay the distribution:

"Funds in a conduit IRA can be used to buyback benefits, but it is not mandated that conduit IRA funds be used. An employee can use other funds, and therefore have basis on the buyback but such contribution would not have to be tested under 401(m) or 415. The employer may ask the employee if the funds are from an IRA in order to correctly treat the funds as basis or not"

The rolllover/transfer issue is an interesting one. Say it is a profit sharing plan that has in-service distribuitons of rollover amounts but you have to wait until termination of employment for anything else. Could he roll in, reclaim his forfeitures, and then roll right back out again to an IRA. Pretty neat for a participant, pretty much a pain in the butt for an administrator.

[PMC]

Resurrecting this -

Employee terminates, receives a distribution and forfeiture occurs. Rolls the distribution to an IRA. Is rehired shortly after termination and wants to "buy-back" and restrore forfeiture. The buy-back is coming from his IRA.

When the buy back amount is contributed via the IRA rollover, does the buy back remain in his "rollover" account in the Plan? If that's the case and his forfeiture is restored to his account, then what's to prevent the employee from either taking a distribution from the rollover account (provided it's permitted by the plan), or rolling out to an IRA again?

Or is that portion of the IRA rolled over to satisfy the buy-back required to restore taken and placed in the employer contribution source from which the forfeiture occurred?

Ex. 'EE takes a distribution of $20,000 and rolls in an IRA.

$5,000 'ER contributions

$15,000 'EE deferrals

Resulting forfeiture of $5000

If the 'EE rolls back his entire IRA now worth $22,000, is that $22,000 put in the "rollover" source in the Plan? In which case the plan could permit an immediate distribution or rollover of that rollover source.

Or, do you take out $5,000 and put that in the 'ER source and the remaining $17,000 is in the rollover source?

[masteff]

Try this recent thread: http://benefitslink.com/boards/index.php?showtopic=39758