withholding on distributions

[Guest pensiondoc]

Whose responsibility is it to withhold? The employer, the trustee or the Plan?

I have a 401(K) plan with individual annuities. A participant requests a distribution on account of termination of employment, the company writes the Employer a check for 100% of the participant's account less any surrender charges. The Employer, believing the insurance company to withhold the 20% (and it doesn't) overpays the participant by 20%.

We notify the participant who thought they received too much and told us they were willing to come up with the 20% by the time they file their taxes.

Number 1, how do we know the participant will? we don't, do we care?

Number 2, isn't the 20% due within 15 days after the month of distribution?

Number 3, how do we code the 1099R if the participant will come up with the 20% on their own?

Number 4, what is the liability to the Employer?

Thanks.

[Ervin Barham]

I believe it is the plan administrator is responsible for the withholding. Sometimes the plan administrator can transfer the responsibility to a trustee (Treas Reg 31.3405©-1, A-4 & A-5). You don't say whether the insurance company is the trustee, or whether an individual(s)is/are serving in that capacity. It is not unusual for an insurance company to send the entire check to the "plan". Mutual funds also do this. Sometimes companies maintain a plan checking account to handle the distributions.

In response to your other questions:

The plan should send the withholding on a timely basis anyway to avoid the penalties. The employer (if they are the plan admin) can make that up out of its pocket and hope that the participant pays them back.

If the withholding is timely made in this manner, you can code the 1099 as normal.

There may be other thoughts out there with different ways this has been handled.