Reversing a participant withdrawal request

[Guest lbz123]

I have a participant that requested an age 59 1/2 inservice withdrawal through the recordkeeper's website. The participant received check and is now saying they made an error when navigating the website. They accidently requested the maximum avaialble, but they really wanted a much smaller amount. Essentially, they have removed their entire account balance, which is a sizable amount, but they wanted only a fraction of the account.

The participant contacted the recordkeeper. Recordkeeper is refusing to reverse the transaction unless we (the plan sponsor/employer) indemnify the recordkeeper AND agree to make good on any loss that will be incurred by reversing the transaction. The indemnification wording they are suggesting is basic holds harmless type wording - no specific regulations or statutes are referenced.

What I am trying to understand is what is risk to our Plan if we authorize this reversal? The recordkeeper has been unable to cite the specific regs or statutes that would be violated by reversing the transaction.

I would like to help the participant out in this situation, but I'm hesitant to act without a better sense of the risk to the Plan. Has anyone had a similar situation occur? Any comments on how other plans handle these types of participant mistakes?

[JanetM]

I don't see the harm in reversing the distribution, as long as the participant hasn't cashed the check. We have done this with loans and hardships when participant decides they don't want/need the funds and they return the check uncashed.

[Guest Pensions in Paradise]

Janet - isn't this heading down a dangerous path? Let's say a participant cashes out today when the mutual fund is at $10 share. A week later the fund is at $15 a share, and the participant says "woops I made a mistake, please reverse my prior cashout."

Also, under what statutory authority can a plan reverse an otherwise valid distribution?

[Bird]

Be careful on this one. When the mutual fund company says they want you to indemnify them, they mean that they will undo the transaction as of the original effective date, and if that means that the account would have been worth more as of the date the original money is returned, they'll send you a bill for the difference (i.e. the scenario that PIP noted - I apologize if this is obvious).

It should be easy enough to just return the check and buy back shares at their current value; i.e. the participant bears all the risk, but in my experience, the fund companies won't do that - it must be undone as of the inception date. (Although it's worth a phone call to ask and clarify that point.)

There must be withholding involved, right? Otherwise, if permitted, the participant might be able to just roll it back and start over.

[david rigby]

The participant received check and is now saying they made an error when navigating the website. They accidently requested the maximum avaialble, but they really wanted a much smaller amount.

Maybe the participant made a mistake. Maybe not. Good advice from PIP and Bird. But this might also be an opportunity to review the "navigability" of the website.

[Guest lbz123]

Thanks to everyone that has replied. There was withholding taken from the distribution, but the participant has not yet cashed the check. I would have thought it would be as easy as voiding the check and starting over, but apparently not.

Our recordkeeper has advised us the we (plan sponsor) will be responsible for any loss if the distribution is reversed. We are okay with that cost, but had concerns about the idemnification part and whether we are violating any specific statutes. I have been unable to locate any guidance regarding reversing distributions in the event of participant error - nothing saying you can or you can't.

From the research I've done, I see no way that the participant could have expected to benefit from taking the distribution and changing his mind. He still wants a distribution, just for a much smaller amount. It does not appear he did this to circumvent any provisions of the plans -- he honestly just made a mistake.

As to the website, it is very basic and overall, I think it is somewhat confusing to navigate. There are also language issues involved that I think played part in the confusion (English not being this person's first language).

Lastly, we are in the process of leaving this recordkeeper. My first impression was that the recordkeeper was being difficult on purpose due to the situation, but I wanted to check and see if anyone knew of any regulatory reasons to not let this happen. I don't want to put the Plan at risk in an attempt to help this guy.

[Bird]

The problem with the indemnification and potential additional deposit to the account from the employer is that it would/should be treated as a contribution to the plan, and then it should be allocated to all participants according the plan terms. If it's a small amount, I am comfortable ignoring this and just having the employer expense it as admin cost or whatever...I don't think it's going to show up on the trust report at all, so it's unlikely to come up as an "issue" at a later date. I know that's not "right" but at some level you have to be practical and recognize that innocent mistakes can happen and you just fix them as best you can.

(But was the withholding deposited already? If so, then it gets really ugly and I'm not sure I have an answer, practical or not, for undoing the whole distribution.)

[JanetM]

PiP we only do this if the time is extremely short, not if the participant has been holding the check. If someone makes a mistake on website and calls in day or so we can void the transaction and stop the check.

[Kirk Maldonado]

I've not researched this point, so I may be way off base here, but couldn't the re-depositing of the funds qualify as a rollover contribution?

[Belgarath]

I was thinking the same thing. Of course, the plan may not allow rollovers, and the 20% withholding has already been done, so this isn't necessarily a perfect solution, but it could alleviate some of the problems.

[JanetM]

It is more like just stopping payment on the check, since the funds haven't left the trust. If the participant cashed the check they are stuck with it.