Under 409A: what if a distribution is made by error and a check/assets must then be redeposited.

[Guest jcarlos]

With respect to 409A, what is the consensus out-there in NQ Land as to remedying mistakes?

Specifically: what if a distribution is made in error and a check/assets must then be redeposited.... what would be the repercussions under 409A?

Would the erroneous distribution be taxable? Would the plan be in jeopardy?

I think the IRS touched on this is their Q&A guidance, but I didn't focus in on the answer as I should've

[mbozek]

Why would the answer be any different than it would be for mistaken payment made under prior law? E.g, if employer pays ee 200k from NQDC under 409A when ee is only entitled to 20k why cant ee return 180 w/out taxation since ee has no legal right to money if employer sued for a return. Same rule applies to excess payments under Qual plans.

[Guest jcarlos]

You are, of course, correct. It should not make a difference if the redeposit is made in a timely manner. I thought they addressed something along these lines at on a Q &A basis.

What do you think about when a distribution is made but the check is not cashed and must be reissued. In this situation, would it appear that someone changed their mind about a distribution? Would that be a horse of a different color?

[E as in ERISA]

Under the new law they can't change their mind about a distribution (unless they do that one year in advance and defer it at least five years). When they get the W-2, etc., I assume that they will want to cash the check.

[mbozek]

Taxation of income usually occurs when the payment is made by the payor, subject to collection of the check by the recipient. e.g, if check bounces there is no income to payee because there is no economic benefit. Same thing if payor stops payment before check is cashed. Not including returned checks as income is premised on the theory that the payee received no economic benefit, although under CR rules failure to cash a check that has been received but not returned does not prevent taxable income.

[Guest Lisha]

Mbozek, What is "CR" (as in "under CR rules")?

[mbozek]

constructive receipt