Rollover of Litigation Settlement

[Guest djw]

ESOP terminated two years ago. Stock "distributed". Participants put stock back to company. Particpants received partial payment and notes. Most participants rolled proceeds and notes over to IRAs. Balance on notes was paid a year later by a new company that purchased the former ESOP company. ERISA and state securities litigation about the purchase price of the stock from participants. Settlement reached with additional proceeds from sale to be made. Payment will come from a former party in interest. The ESOP and trust no longer exist. Can payments be made directly to IRAs and participants according to their original elections? If no, who issues the elections? Will new 1099-Rs be required? If yes, who issues the 1099-Rs? Thank you.

[John G]

Can't answer your question, but I suggest that the issue might have been addressed by the court that ordered or signed off on the settlement. A closely related issue would have occured with the NASDAQ settlement about trading practices where checks were distributed to "damaged" parties.

[mbozek]

Since a rollover can only be effected for a distributon from a qualified plan the only way for the payment to be eligbile for a rollover would be if the distribution is received from the plan and a 1099R is issued. A payment directly from a defendent would be looked at as a judgement in damages not a payment of retirement benefits.

[Kirk Maldonado]

There are a number of PLRs addressing this issue. A little research will reveal the answer.

[Appleby]

From what I recall, the PLR’s I have seen that addresses this topic allowed the amount to be credited to the account that was involved in the lawsuit. For instance, the credit would be allowed to the IRA, if the IRA was involved in the lawsuit…see 200452052 for instance...

Since a rollover can only be effected for a distributon from a qualified plan the only way for the payment to be eligbile for a rollover would be if the distribution is received from the plan and a 1099R is issued.

Agreed...also, bear in mind that if the amount is credited to the IRA as a rollover, a Form 5498 will be issued for the amount. This begs the question ( from the IRS and other interested parties), from whence did the rollover come?…as a Form 5498 is usually offset by a Form 1099-R. If the amount is rolled directly to the IRA before being credited to the ESOP, no 1099-R would have been issued for the amount,

Additionally, if the check was made payable to the ESOP, it cannot be deposited to the IRA

[Kirk Maldonado]

I seem to recall that the PLRs made a distinction if the payment came from a separate fund, rather than from the plan; not allowing rollover if the payment came from the fund. Under that line of reasoning, the payment here wouldn't be eligible to be rolled over because it wasn't a payment from a qualified plan.

I'm not sure how the IRS would come out if the plan no longer existed (so that it would be impossible for the payment to be made by the plan), but I wouldn't be optimistic.

[Guest djw]

Thank you to all who have replied so far. Kirk Maldonado's reply was particularly helpful and he is correct that there are about 5 PLRs that address the situation where the settlement payment comes directly from the defendant and not through a plan. The IRS has ruled consistently that these payments cannot be rolled over. But, if they come from a plan they may be rolled over.

Payment has not yet been made. I wonder if anyone has any experience with or information about "reviving" or "reinstating" a plan for the sole purpose of receiving settlement and making payment to participants. Per Massachusetts Mutual Life Insurance Co. v. Russell 473 U.S. 134 (1985), amounts recovered under the general fiduciary liability provision are not payable to a participant personally, even in the case of a civil action brought by a participant, because such recovery must be on behalf of the plan.

Thank you

[Kirk Maldonado]

DJW:

Thanks for the kind words.

The resurrection of a plan was very carefully considered in a deal I worked on a number of years ago. The eventual decision was that it was too aggressive after spending a fair amount of time analyzing the issue, but I don't recall why we reached that conclusion. It may have had something to do with the possible risk that the reinstatement might jeopardize the prior termination, but I just can't recall at this point in time.

[mbozek]

One problem with reinstating the old plan is that it must be brought into compliance with current tax law in order to make a distribution as well as incur costs for 5500 filing, etc. One possible alternative would be to establish the old plan as some form of standardized plan for one year in order to make the distribution.