In-Service Distrtibution

[Guest HD WILLIAMS]

An employer allowed an in-service distribution that was not allowed by the plan document. What options are available to the employer to correct this defect if the employee does not have the money to pay back the distribution? I would appreciate any help on this matter! Thanks!

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[Disco Stu]

I respectfully disagree with this approach. One thing that 98-22 says, is that the correction method should restore the plan to the point it would have been, had the error not occurred.

IMHO, the employer should pony up the dough themselves to reimburse the plan. It was the employer's error to begin with.

If the employer wants to be reimbursed by the participant, that is a seperate matter. The plan should come first however.

[Wessex]

When I first encountered this situation, my view was the same as Disco Stu's. However, the IRS National Office, in informal telephone conversations, advised that their normal required VCR correction method in this type of situation was to give the employee an election to return the money or not. The employer was not required to make the plan whole in this situation.

[Guest HD WILLIAMS]

THANKS FOR THE ANSWERS. IN RESPONSE TO DISCO STU, THE DISTRIBUTION WAS MAINLY SALARY DEFERRAL AND THE PARTICIPANT IS 80% VESTED. IF THE EMPLOYER REIMBURSES THE PLAN, WHO WOULD GET THE MONEY? IF YOU CREDIT IT BACK TO THE EMPLOYEE, WOULDN'T HE BE GETTING DOUBLE THE MONEY WHEN HE EITHER TERMINATES OR RETIRES? I KNOW THIS INFO. WAS NOT IN THE ORIGINAL QUESTION.

[Guest bswift]

my recollection is that you might be able to correct under Rev. Proc. 98-22 and request that the participant repay the distribution that should not have occurred. Document the request and the fact that the participant said no way.

[Disco Stu]

I'm in no position to either confirm or dispute the information provided by Wessex. It's certainly possbile that the IRS may take that stance. As Wessex says though...this is not an official position.

In answer to your question, assuming that the employer would not be able to recover the overpayment from the participant...then yes, the participant would get double payment.

The rationale for this would be that since the participant was not eligible to receive a distribution, his/her retirement benefit should not be affected by an error by the plan administrator. The employer should therefore make the plan (participant's account) whole.

There are clear regs about under what circumstances salary deferrals can be distributed from a qualified plan. There are also rules about assignment & alienation of participant account balances. Additionally, this is the plan administrators screw up. If anyone is to be damaged by this debacle, it should be him/her. The qualified status of the plan should not be jeopardized.

I think that the solution I suggest is the one that stays closest to the letter of the law. Granted...this is a pretty hard line, but it's probably the safest.

Q&A #22 sort of addresses this issue. You may want to check it out & see how your fact pattern fits in with their opinions.

[This message has been edited by Disco Stu (edited 02-09-99).]

[Guest greymann]

This is not directly on point, but a very similar situation. We recently paid out too much matching contribution to certain employees, and some of these employees then terminated service and took a distribution. We self-corrected by requesting the excess match back, which was documented. None of the employees responded. Our plan was then subsequently audited, and the revenue agent approved of our self correction.

[Harwood]

Disco Stu - what is your reference to Q&A #22?

[Disco Stu]

Go to the main BenefitsLink page and click on Q&A Columns. There is a Plan Defects area in there. Be sure to read the disclaimers.

[Guest bswift]

I guess i neglected to say in my original response that the director of the vcr program told us that requesting that the participants repay the amount erroneously distributed was the irs' correction method. in any event, it appears that the practical approach (and the one the irs will take) is to request the distribution back and document the request and the answer, if any.