How would you correct a failure to offer an in-kind distribution of employer stock?

[Guest HelpMeHelpYou]

The headline shows it all. This is a failure to follow the terms of the plan that has been ongoing for several years. Plan provides for in-kind distributions, but the plan has just been making lump sum distributions in cash.

[mbozek]

Has the stock appreciated since the participants were cashed out? If not why would the participants accept an offer to receive stock for cash? If stock has appreciated how is the plan going to pay for the stock to distribute to participants in excess of the cash they received?

[BeckyMiller]

We have submitted several of this kind of operational defect to the IRS for relief under EPCRS. I can't recall that we have dealt with this specific problem, but similar distribution problems where there is an argument that the participant was not really denied a right - i.e. if you had offered them a choice or cash or stock, they would have taken cash, anyway.

In several situations, the IRS has allowed us to correct just by cleaning up the procedures within the plan's future administration and not going back to make any change with respect to past participants.

Can't promise that will be available here. You might first see if you can find out what would have happened had the participants had the right to take stock or cash. If you can document that they all would have taken cash, anyway, you might have a strong EPCRS application.

Obviously, the employer needs to review their options with respect to future distributions, also. Do they meet one of the exceptions to distribute cash only?

[JDuns]

The ability to receive the stock rather than cash is not a protected BRF so you could eliminate it prospectively if you don't want to change the administration going forward.

An employee who takes a distribution of stock in kind recognizes ordinary income equal to the plan's cost basis in the shares distributed and then would pay capital gains on the earnings on a later sale of the stock. This can have a big impact on the potential tax implications of the distribution for the employees.

That being said, I have not faced this error and do not have any correction methods to propose.

[Kirk Maldonado]

BeckyMiller:

You've had better luck than I have.

Where my client failed to offer annuities to departed employees that took lump sum distributions, the IRS has always requested that we offer to the former employees the right for them to repay the lump sum distribution and receive an annuity in exchange. Not one person has accepted the offer of an annuity, but we were still required to make the offer to all of the former employees who already had received lump sums. (The IRS didn't require us to make offers, though, to people whose distributions were less than $25.)