Today's Prize for Client Error: Paying participant distribution from corporate assets rather than plan assets

[Guest Carolyn Barnard]

Yes, that's right...the client just decided to write this terminee a check from the company's checking account rather than have the funds issued from the plan. Incidentally, the amount they paid the terminee was at no time her actual vested balance (go figure). This occurred back in 2001 and the plan is now terminating. Of course our records still show she has money in the plan, but the client is adamant that she not receive a distribution from the plan because they consider her already paid out. I don't even know where to begin. Does anyone have any thoughts?

[david rigby]

Does anyone have any thoughts?

Oh, you mean about your question.

Suggest that you will act at the direction of the plan's ERISA counsel. The TPA does not want to be making the decision.

[Blinky the 3-eyed Fish]

I am betting there is no ERISA counsel and is the case with 99% of small plans. This sounds like a small plan mistake.

Anyway, it seems as if you can treat it one of two ways, 1) the plan didn't pay the distribution, therefore, no distribution was paid or 2) the corporation loaned the plan money effectively, a prohibited transaction. I lean heavily toward the latter.

But I can't tell how you are treating it Carolyn. Was the corporate distribution greater or less than the person's vested balance? Why was this not addressed with the client 4 years ago?

[Guest Pensions in Paradise]

1) What was the amount paid to the participant?

2) What was the participant's actual vested benefit?

3) Was the amount paid to the participant reported on her W2?

4) Is the plan subject to QJ&S rules?

[Ron Snyder]

The distribution check was simultanously a plan contribution by the employer and a distribution by the plan. To the extent that the distribution was for less than the correct amount, a correction needs to be made by the plan. If the payment was too much, good luck on recovering the excess.

[Blinky the 3-eyed Fish]

The distribution check was simultanously a plan contribution by the employer and a distribution by the plan.

That is an interesting interpretation. Have you any experience if the IRS would agree? Without the actual deposit into the trust, I personally don't see how you could treat it as a contribution.

[mbozek]

In order to anyalyze this transaction dont you need to know how the 2001 distribution was reported to the IRS, including income and FICA withholding. If it was reported as w-2 income there is no basis for a distribution from the plan. The anlaysis must be based on what the client did under the facts, not what the client thought they did in 2001.

[Guest Carolyn Barnard]

OK, A lot of good remarks and questions. For those who haven't already responded as to how it should be treated, I did err when I said the amount paid out was never her vested balance. It was her vested balance after the 20% withholding, so at least they did something right. We prepare their 1099s, and since we didn't know that this person had been paid anything, no 1099 was prepared. The client did not alert us to their activities on the corporate side. Since they did withhold, however, I'm assuming the taxes were sent in. Her balance was 210.70, net payout was $168.55, plan is not subject to J&S, and I am still trying to determine if the amount was reported on W-2. Several of you have indicated that the W-2 reporting is key as to how this should be handled, so am hoping to get that info shortly.

[Guest Pensions in Paradise]

$210? Just pay her out of the plan and be done with it. If the client doesn't like it, point out that it will cost them $500 of your time to fix the problem. Problem solved.