Participant has 20% of account withheld by plan and remainder paid in

[Guest Linda Kirby]

Client terminated employment and tells me that he requested a distribution check from employer's 401(k) plan with no taxes withheld because he was going to deposit the funds into his IRA account.(I realize he should have done a direct to direct rollover.) However, when he received his check taxes were withheld. He has not cash the check. Can he return the check to the Plan Administrator and ask for either a new check or decide instead to do the direct rollover? Or is it too late? He does not remember receiving his options for methods of distribution or having signed a form indicating his choice of distribution options. Thanks!

[Dave Baker]

Note to pax - your reply in this topic was accidentally deleted, while I was trying to fix some wierdness in the message board script - please repost. I apologize! Thanks.

[david rigby]

Can you do it? That is, has the withheld amount already been deposited in the IRS depository account? If you have the ability to accomodate the request, then it should be considered. However, this does not mean that you must.

But the last part of your message casts some doubt that the participant was properly informed of his options. That should probably be investigated. If true, then you should make a sincere effort to reverse the transaction and reissue it as a direct rollover.

As always, facts and circumstances can lean you one direction or the other.

[Guest]

I don't think it's a good idea to get in the habit of doing this---what if every other participant decides to change his/her mind before the distribution check is cashed?

[david rigby]

dsilver has a good point, but that is also my point about "facts and circumstances"

If the EE has made an election (without ambiguity presumably) and the check has been delivered, then the Plan is merely inviting employees to have a second chance, which will eventually cause a problem with some EE feeling "left out". There are circumstances in which the Plan may want to take the opposite approach, such as when the EE group is small, or when there is obvious precedent, or (most importantly) when the EE may not have been fully informed of the election. This last point is exactly why the election should be in writing.

[Dave Baker]

Your client can avoid income taxes or early distribution penalties on the 20% that was withheld, even if the plan won't reissue the check -- the following is taken from the IRS' model notice to participants regarding their direct rollover rights (http://www.benefitslink.com/IRS/notice92-48.shtml (click)) -

"Sixty-Day Rollover Option. If you have an eligible rollover distribution paid to you, you can still decide to roll over all or part of it to an IRA or another employer plan that accepts rollovers. If you decide to roll over, you must make the rollover within 60 days after you receive the payment. The portion of your payment that is rolled over will not be taxed until you take it out of the IRA or the employer plan.

"You can roll over up to 100% of the eligible rollover distribution, including an amount equal to the 20% that was withheld. If you choose to roll over 100%, you must find other money within the 60-day period to contribute to the IRA or the employer plan to replace the 20% that was withheld. On the other hand, if you roll over only the 80% that you received, you will be taxed on the 20% that was withheld.

"Example: Your eligible rollover distribution is $10,000, and you choose to have it paid to you. You will receive $8,000, and $2,000 will be sent to the IRS as income tax withholding. Within 60 days after receiving the $8,000, you may roll over the entire $10,000 to an IRA or employer plan. To do this, you roll over the $8,000 you received from the Plan, and you will have to find $2,000 from other sources (your savings, a loan, etc.). In this case, the entire $10,000 is not taxed until you take it out of the IRA or employer plan. If you roll over the entire $10,000, when you file your income tax return you may get a refund of the $2,000 withheld.

"If, on the other hand, you roll over only $8,000, the $2,000 you did not roll over is taxed in the year it was withheld. When you file your income tax return you may get a refund of part of the $2,000 withheld. (However, any refund is likely to be larger if you roll over the entire $10,000.)"

[Lynn Campbell]

What is the procedure to retrieve the funds from the IRS, assuming this is the only time that funds were withheld for this Plan this year?

[Guest JF]

Linda Kirby didn't mention in her message the amount of the distribution. It is possible if the amount in the account balance was less than $5,000 that the plan did an automatic distribution that would not require the employee to make an election. The account can be cashed out without consent. A notice should still have been sent with a 30 day election period, but if the employee didn't reply, the plan had the right to make the distributon and withhold the 20% without the employee consent.

[GBurns]

It is irrelevant if the withheld amount was or had been deposited in an IRS depository. There are adjustment and correction procedures for such matters. Also, regarding the employer giving a "second chance". It is not the employe's choice. It is the employee's right as allowed by law.

[Guest Chris O'Daniel]

GBURNS - Where are the "second chance", "oh I changed my mind" statutes? Our distribution forms state that it is a one time binding agreement, your telling me that I have to allow the employees time to change their mind?

[Wessex]

I'm with Chris - please give us a cite if you mean that participants are always allowed to change their elections. I'm not aware of any law that would require a second bite at the apple if appropriate notice and information is given at the time of the initial election. Not complying with the election is a different matter, of course.

[david rigby]

I'm with Wessex on this one. The only thing I am aware of is that the participant can change his mind *before* a distribution is made. Obviously, if the check has been cut, then the distribution has been made.

[Guest Linda Kirby]

Thanks for all your replys. Here is the upshot. My client called the Plan Administrator to inquire about replacing the check. The Administrator agreed to let the client return the check and then issue a direct rollover to the client's IRA. Was the Administrator just being a nice guy--I don't know. At any rate the fact that the client could have gone ahead and deposited the full amount of $ into an IRA himself if the Administrator declined to re-issue appears to be the alternative for a "change of mind" situation.