Judgment a reported tax event

[Guest RD73]

Is a judgment requiring that a trustee's account balance be forfeited or setoff (the trustee's account balance was forfeited to the plan's forfeiture account and redistributed to the other participants) a taxable event that is required to be reported on Form 1099-R?

I haven't been able to locate any authority indicating that it should be reported as taxable event but the DOL seems to think that it is.

[Guest mjb]

Under the IRC income is taxed to person who earns not the person to whom it is assgned, unless there is a statutory exception, e.g. QDROs. For example, retirement benefits transferred to a spouse are taxed to the spouse but retirement benefits transferred to a child under a QDRO will be taxed to the employee. The provision reducing benefits earned by a trusteee who is convicted of a breach of fiduciary duty is defined as a permissible assignment of benefits under IRC 401(a)(13)(E) which would make the transfer taxable to the employee. You need to determine if the trustee's benefit forefiture is subject to this provision.

[Guest RD73]

Under the IRC income is taxed to person who earns not the person to whom it is assgned, unless there is a statutory exception, e.g. QDROs. For example, retirement benefits transferred to a spouse are taxed to the spouse but retirement benefits transferred to a child under a QDRO will be taxed to the employee.

I had not considered that concept. Good point. Thanks.

Previously, I reviewed IRC 401(a)(13)© and I read it as relating to the qualification status of the trust. In other words, for the trust to be qualified it must not allow for assisgnment or alienation of benefits, unless an exception applies. In this case, the exception is the special rule for judgments. The step I am missing is under what authority is it taxable? Is it 402(e)? Maybe, I've missed the point of 401(a)(13)©.

Also, I did not see 401(a)(13)(E) that was referenced.

[Guest mjb]

Sorry it is 13©. The Conference report for (13)© states that the offset is includible in income on the date of the offset. There is case law going back to 1940 that taxes the assignment of retirement benefits to the employee who earned the income.

[Guest RD73]

Thanks again.