Correcting an in-kind distribution

[Guest CitationSquirrel]

Facts: HCE1 is the original founder of a company. He is over 70. He is an HCE based on ownership through stock attribution (i.e., his son now owns the company). The plan is a 401(k) plan. This is a balance-forward plan with one large pool of investments for all participants. The pool consists of cash and various stocks. For purposes of this question, the stocks are referred to as A, B,C,D,E, and F (all of the stocks are “normal” publicly traded stocks … all household names). HCE1 decides to take a large in-service distribution in the amount of $200,000. He elects to receive an in-kind distribution, which is allowed under the plan document. This is where it gets interesting. On his election form, he requests that he receive 500 shares of A, 800 shares of D and 1,250 shares of F. He is then paid-out in this manner.

We discovered this transaction after-the-fact and realized that we had an effective availability issues with a BRF. While any participant in the plan could elect to receive an in-kind distribution, there was no way that the owners would allow Johnny Lunchbucket to pick and choose the stocks he would receive. While this is the only in-kind distribution that was ever done, it is assumed that if a NHCE would ever make such a request, the investment committee (i.e., the owners) would determine which stocks would need to be liquidated to pay the participant and then those shares would be distributed to the participant. Because of the date of the transaction and the fact that it was not insignificant, we cannot self-correct. We are looking to use VCP (or whatever they call it now).

Questions: (1) How do you correct this under VCP? Its been over two years, does the participant return the shares and then have the company re-distribute to the participant? (2) How do you calculate the correction amount? The participant received the correct amount. Do you have to look at whether he picked winners or losers? And what if he would have received some of the same shares if he had not been allowed to pick and choose? What if the plan actually did better without the shares that were distributed? (3) Would it just be best to make a John Doe submission and let the IRS determine what they want us to do?

Extra Credit: How much wood could a wood chuck chuck if a wood chuck could chuck wood?

[Guest JimD]

If the NHCE's knew (written in SPD) they could request an in-kind distribution I would argue that there is effective availability. The investment committee has a fiduciary duty to all of the participants. But if all of the investments were "trust quality" I'm not sure there is a fiduciary issue.