Invalid in service distribution

[Guest padmin]

One man money purchase plan pays an in service distribution to a sixty year old participant in 2005. Plan does not allow for in service distributions. The amount paid was $600,000. No withholding no spousal consent. What should we do? I know that we can obtain spousal retroactively but what about the plan provision and the withholding?

Any help appreciated

[Guest mjb]

change normal retirement date to 60 retroactively. What witholding are you thinking of? The 20% withholding tax must be withheld at distribution.

[Guest padmin]

The 20% mandatory withholding was not taken at time of distribution. Do they have the participant repay the 20% and submoit now even though it will be late and subject to penaslty?

[Guest Pensions in Paradise]

What about the 1099?

[Guest mjb]

Are you stating that the participant did not elect a direct rollover on a 600G distribution and will pay tax at the 35% marginal rate? 20% w/holding is 120G.

[Guest padmin]

The 1099-R was produced by accountant. Direct rollover not elected...cash distribution.

[Guest Pensions in Paradise]

Because of the amount involved, you may want to consider submitting the plan to the IRS under the EPCRS correction program.

Just curious as to why the participant elected a lump sum distribution of $600,000. If I were you I'd get that spousal consent ASAP.

[Kirk Maldonado]

mjb:

I thought that the IRS officially frowned on trying to correct operational errors by retroactive amendments.

[Guest mjb]

I dont see anything in the IRC that prohibits an inservice distribution from qualified plan after 59 1/2. What can be done since the toothpaste is out of the tube? I dont understand why a MP plan cannot pay an inservice distribution at age 60 just like a PS plan? I am not even sure what the down side is if he did not rollover the distribution. This appears to one of those if the tree falls in the forrest and no one hears it type of violation.

[Guest padmin]

Some research has led us to the following:

Retro-amend can be adopted but the plan must be submitteed through VCP

Spousal must be obtained retroactively. The issue is the withholding. We think he participant must repay the 20% and the plan must submit this amount. As to why this was a cash distribution and not a rollover.. the participant had a personal tax situation in 2005 that made it an appropriate year to recognize the income.

[Guest mjb]

At this point in time I dont know what good it will do for him to repay the 20% to the plan since the filing date for 2005 is next monday. The employee will pay taxes on the distribution that include the 20% withholding amount. Repaying the 20% to the plan only means that the employee will have to file an amended return for a refund. I dont think that repaying the 20% will eliminate the penality for failure to withhold 20% upon distribution. The client needs to consult a tax advisor to determine what the penalty is and whether there is any benefit in repaying the 120k (which the employee may not have after he pays the 2005 tax). I dont know what is the benefit of a VCP filing if the distribution was not rolled over since the distribution will be includible in income if the plan was not qualfiied.

[Bird]

I wouldn't worry about the failure to withhold at this point. I think the liability for failure to WH comes back to the trustee, and it sounds like that's him anyway. That is, I don't believe there are any IRS penalties for failure to withhold.

BTW, MP plans can only do in-service after NRD, hence the suggestion to amend the plan's NRD to 60.