IRA Rollovers for Returned Distribution Checks

[Guest wolfman]

Assume a situation where the amount involved is within the involuntary cash-out / automatic IRA rollover range of $1,000 - $5,000. The terminated participant elects a cash distribution (minus withholding) and the check is prepared and mailed. Some time later, the check is returned as undeliverable or is never cashed. Attempts are made to locate the participant but the search is unsuccessful. Due to the passage of time the withholding may not be recoverable and we are left with 80% of the taxable amount in the cash account of the plan. Assuming the 1099-R record can be changed and we have written authorization from the plan sponsor, I would think it would be appropriate to allow the rollover of the remaining amount to the IRA. The revised 1099-R would reflect the rollover of the amount involved and the taxable amount would be the withholding. This would serve a couple of purposes: 1) preservation of the participant's distribution, and 2) allowing the plan sponsor to be in compliance with the plan document requirement to distribute the vested account balances of terminated participants with balances ranging from $1000-$5,000. Any thoughts?

[mbozek]

I dont understand how the plan can effectuate a rollover on funds that were distributed and constructively received by the participant, other than as a recession of the distribution which must occur in the same yr. as the distribution. The plan must also reverse the 20% witholding on the distribution to be consistent. The plan cant contribute after tax money that was included in a participant's account as constructivley received to an IRA because the amount has previously been distributed.