Is this really a "Distribution", requiring a 1099?

[Guest Happy Actuary]

Here is a goofy question:

Once in a while, I get appointed as a Trustee of an orphan plan. The DOL is usually very involved in these plans.

As part of a settlelement with the DOL, the old ("bad") Trustee has agreed to forfeit his a/c balance and have it shared with the other particpants. This is occurring in conjunction with a plan termination.

Question: Is this forfeiture/re-allocation treated as a "taxable distribution" to the old Trustee, subject to 1099 reporting?

Why it is a distribution:

- this is really several transactions wrapped up in one, and it alleviates the need for him to take a taxable payout from the plan and to then reimburse the plan from it.

Why it is not:

- it is not really a "distribution"

- the money is already being taxed when it is distributed to the others.

Any ideas??

Thank you in advance!!

[MGB]

Although further details are warranted, it sounds like two transactions: One a distribution, and second, a repayment to the plan under some agreement with the DOL for some type of misconduct.

If that is the scenario, why wouldn't it be it a distribution?

The fact that it is later distributed to another participant doesn't sound like it has any bearing.

[Guest Ken Bonus]

Quite a few years ago, the IRS issued some PLRs dealing with the situation of a key owner in a DB plan agreeing to waive some or all of his accrued benefits in order to help the plan fund the benefits due to the non-key employees. The IRS ruled that this was essentially a distribution followed by a contribution back to the plan. I think the same reasoning would apply in your facts but you may want to hunt up these older rulings.

[mbozek]

Under the assignment of income rule, a participant will be taxed on any retirement benefits assigned to another person unless there is a statutory exception, e.g., QDROs. The participant will not be taxed on a forfeiture which can only be made for specifically enumerated exceptions in IRC 411(a)(3).

Real question - how is the payment described in closing documents? Is the employee agreeing to a forfeiture of vested benefits or is the employee consenting to payment of his benefits to the DOL. In the case of a reducton in the vested benefit of a participant because of a violation of the fiduciary provisions of ERISA, the offset amount is included in income on the date of the offset.