Late Distributions from MPPP

[chris]

Shortly prior to end of 2006 Employer segregated out terminated participant's accounts and proposed to pay them out. 1099-R was issued, however, admin personnel never sent check. Thus, account balance stayed in segregated account until recent plan internal audit (not IRS). Off the top of my head appears that reasonable correction would be to issue corrected 1099-R's (if possible) and distribute out acct balances plus the higher of rate of return for period in question or IRS underpayment rate under §6621. There are also the distribution forms issues as well. Any suggestions appreciated. Thanks.

[chris]

Consultant advises to treat the two balances (not distributed out) as being in the general fund and go back and reallocate earnings of general fund for 2006 and allocate a piece of the 2007 earnigs to them as well. Obviously, appears to be a 411d6 issue as to the other participants. Proposed alternative would be for the Employer to make a restorative payment into the plan as to the two accounts not distributed and not invested. The restorative payment would be determined by the rate of return for the general fund which is where the accounts would have been held. Any thoughts?

[Bird]

Definitely issue a corrected 1099-R. The participant didn't say anything about getting a 1099-R but no money?!

If your plan permits segregation to a separate account, and it earned interest, I would just pay out that amount now. If forms were already signed, I would issue a new Tax Notice and complete the payment. (Again, the participant never asked about the payment, if forms were signed?)

If the plan didn't permit segregation, then I might agree to just include those accounts as part of the general pooled fund and allocate earnings of the general fund to the terminee...for 2007, if the money stays in through the end of the year. If it was moved to a segregated account late in 2006, then I have to wonder why then and not early in 2007, when the amount to pay was known, and I have to wonder if the participant was credited with gains from the general account for 2006. But if they were credited general gains for most of 2006, then I wouldn't bother fixing a little bit of gain for the rest of that year. (But it doesn't make sense to me that the participant would be credited gains for most of, but not all of, 2006, at least in the context of the way we run a plan.)

I'm not sure that the failure to pay is such a problem that it needs restorative payments and/or re-allocation of gains or losses. But the whole segregation timing and allocation thing isn't quite clear to me either.

[chris]

Thanks for the response Bird. The problem is that the Employer's personnel handling the distributions moved the money into a non-interest bank account in name of the Plan in anticipation of writing the checks for the distributions within the next few days. Problem is that personnel never made the distributions and the money sat there w/o earning anything for almost all of 2006 and now the better part of 2007.

[Bird]

Ah, your original post said the money was moved shortly prior to the end of 2006. I think I get it now, the 12/31/05 val was done and money was moved out fairly early in 2006? That make some sense.

I agree with the consultant that the most proper correction would be to reallocate as if the segregated money was part of the pooled account. I don't think it's really a 411d6 issue if this means that some other participants get less; it was just a correction of a mistake, not a true cutback. But it's a major hassle and if not a 411d6 problem an employee relations problem. The alternate solution sounds ok to me; I don't know about the official correctness of it but it's very reasonable.

[chris]

Thanks, Bird. E/er doesn't want to field questions from 80+ other e/ee's as to why they now have less money re 2006 allocations. Most likely E/er will go with alternative solution... Thanks again for the responses.