Distribution timing - withdrawal date or check date?

[Guest Emiman]

We are a TPA which requests client distributions directly from the mutual fund company, they wire the funds to our non-interest bearing checking account (strictly for distributions) in which we issue the checks and complete the 1099r entry. Our policy is to release the funds 7 - 10 days after the checking account receives the assets from the mutual fund company.

My question is what year is used for the 1099r issuance? If the funds are requested and distributed from the mutual fund company on 12/27/04 but we do not issue the check until 1/4/2005 is the distribution technically in the 2004 or the 2005 year?

The mutual fund company nor our firm is the Trustee of the assets. Any help would be greatly appreciated.

[WDIK]

First, I have never been comfortable with the sort of arrangement that you describe.

Second, I give it as my opinion that the distribution ocurred when the money left the trust, in other words 2004.

Third, I have never been comfortable with the sort of arrangement that you describe.

[david rigby]

No special expertise in this area.

IMHO, if you send a 1099 for 2004 but the check is dated January 3, 2005, you will have a problem. My experience has always been that the date on the check controls which 1099 is issued.

BTW, could it be argued that the check writing account (for lack of a better name) is a subset of the trust? I don't know, but I doubt you can claim a distribution was made just because the funds were transferred to another account.

[WDIK]

pax:

If the mutual fund company issued a check to the TPA, wouldn't you consider that as the controlling date? If so, would a direct transfer be any different? If not, are you considering the TPA's checking account as some type of multiple employer trust?

(EDIT: Your edit addressed the issues brought up by this post.)

[Demosthenes]

Let me echo WDIK

I am not comfortable with this kind of arrangement

However, the date of the distribution is the date on which the payee could have assumed constructive receipt of the funds. i.e I have possession of the funds (or at least you no longer have them) and can do something with them.

That's the date of the check, Fed Fund Wire, or EFT.

As to not being a Trustee, I wouldn't bet the ranch on that one. You have control over the Trust's assets for some period of time and excercise some discretion, at least to the timing of the check, the variable 7-10 days.

[WDIK]

Let me amend my second statement.

I would consider it a 2004 distribution if all of the following are true:

1) The participant requested the distribution.

2) The TPA checking account is not considered a plan investment.

3) The TPA is not considered a partner with the plan.

Otherwise I can see the logic behind considering a 2005 distribution.

(Determining wheter 1, 2 and 3 are true or false is left as an exercise for the reader.)

[SoCalActuary]

You hold plan assets, so you are clearly some form of fiduciary. You are probably not intending to be a trustee, nor have you been appointed one.

The trust fund has placed some of its assets with you, and they have not been distributed to the participant during 2004. I would think that your checking account becomes a common pooled fund, subject to the normal fiduciary duties like audit, bonding, and probably some state trust law issues.

As such, you have not distributed until you have sent the check, so no 1099 in 2004.

If this is a DB plan, you probably also have a revaluation issue.

If this is a DC plan with pooled accounts, you may also have a revaluation issue.

[E as in ERISA]

Parties in interest CAN potentially make interest free loans to plans. For example, cut a check on behalf of the plan and then get reimbursed. And the DOL just issued a proposed amendment to the rule in PTE 80-26 yesterday that would lift the restriction on number of days. Sometimes sponsors cut the distribution checks and then get reimbursed by the fund based on that PTE.

On the flip side, plans CANNOT make interest free loans to parties in interest. So if you are party in interest and you're holding plan money for a period before you are satisfying the obligation, that may be a PT.

For trustees, they usually write the checks at the time they debit the plan's account. So then the issue becomes one about "float." There was a field assistance bulletin 2002-3 discussing how you have to disclose to the plan how the benefit of that float will be used to defray the plan's expenses.

You may have a prohibited transaction simply by holding the money before writing checks -- or at the very least by not complying with the rules of the FAB.

[david rigby]

If the mutual fund company issued a check to the TPA, wouldn't you consider that as the controlling date?

Absolutely not, especially in light of this from the original post:

The mutual fund company nor our firm is the Trustee of the assets.

[mbozek]

For tax purposes the distribution to the participant occurs on the date the payment is either mailed or wired by the payor to the participant. Payment to an intermediary is not payment to the participant unless the intermediary is the agent for the participant.

[SoCalActuary]

You should also consider a long discussion with the people of Penchecks, who thoroughly understand the trust and fiduciary issues here.