Distribution Paid From Corporate Account

[Dennis Povloski]

I posted this question to TAG, but I'd like to hear what other people think...

Balance Forward Plan. A participant turned in distribution request to the employer in 2008. The most recent valuation date was 12/31/2007. The employer paid out the distribution from his corporate account in error. Jump to 2009. In reconciling the 2008 assets, we noticed that no distributions were paid from the trust account, which is how we discovered the error.

We've now passed another valuation date, and during 2008, the participant's account lost 40% due to investment losses.

We understand that the plan still needs to pay her a distribution, and that the owner essentially paid her a bonus by paying her out of the corporate account.

My question is how much do we distribute now? The current value of the account? or the amount she was quoted back when she filled out her distribution forms?

Thanks!

[mbozek]

I posted this question to TAG, but I'd like to hear what other people think...

Balance Forward Plan. A participant turned in distribution request to the employer in 2008. The most recent valuation date was 12/31/2007. The employer paid out the distribution from his corporate account in error. Jump to 2009. In reconciling the 2008 assets, we noticed that no distributions were paid from the trust account, which is how we discovered the error.

We've now passed another valuation date, and during 2008, the participant's account lost 40% due to investment losses.

We understand that the plan still needs to pay her a distribution, and that the owner essentially paid her a bonus by paying her out of the corporate account.

My question is how much do we distribute now? The current value of the account? or the amount she was quoted back when she filled out her distribution forms?

Thanks!

I think understand what you are saying now-the plan wants to pay distribution to the participant from the plan but doesnt know the correct amount. It seems that the plan owes her the amount due at the time the participant requested a distribution regardless of the 40% decline because that was the value when the request was made - the plan cannot benefit from its own wrongdoing by paying 40% less than the amount due at the time the distribution was requested in 2008.

Was the 2008 amount reported to the IRS and participant on a 1099R for 2008? or a W-2?

[Belgarath]

I don't know how much money is involved, and whether it is worth getting a legal opinion, etc..

This could be considered a prohibited transaction under IRC 4975©(1)(B), and the parallel ERISA provision (from memory, maybe ERISA 406?). I don't think it qualifies for the exemption under PTE 2000-14, PTE 2002-13 and PTE 2002-14. Perhaps it would be less expensive for the sponsor to declare and correct the the PT and have the plan reimburse him the 60% that remains? I haven't really thought this through, nd am sort of firing off random thoughts, but at least worth thinking in this direction. I suspect others will have some more coherent thoughts on this.

[mbozek]

I don't know how much money is involved, and whether it is worth getting a legal opinion, etc..

This could be considered a prohibited transaction under IRC 4975©(1)(B), and the parallel ERISA provision (from memory, maybe ERISA 406?). I don't think it qualifies for the exemption under PTE 2000-14, PTE 2002-13 and PTE 2002-14. Perhaps it would be less expensive for the sponsor to declare and correct the the PT and have the plan reimburse him the 60% that remains? I haven't really thought this through, nd am sort of firing off random thoughts, but at least worth thinking in this direction. I suspect others will have some more coherent thoughts on this.

What's the PT if the ER paid the employee from corporate funds instead of plan assets? Participant's benefits are still in the plan and the plan is willing to pay participant her accrued benefit without asking for return of money paid by employer so it cant be an extension of credit.