Distributions in Error

[Guest Bizitchie]

I have been asked a question by a plan participant. He apparently was a participant in a profit sharing plan which was valued annually. He terminated during the plan year 2008 and the plan sponsor/administrator made a distribution to him in 2008 based on the 2007 valuation. Well we all know what happened to the market. After the valuation was prepared for 2008, the plan sponsor requested he pay the funds back due to the stock market devaluation. I just want to know what anyone else's thoughts are on this. I have several thoughts. One being, did the plan sponsor make distributions to terminated plan participants immediately in past years, when the market was up and then make additional distributions to them for the market increase? Did the plan allow for distributions to be made immediately or did he go against the plan provisions? I have not seen the plan document, so I can't answer these questions. I am just wondering if anyone has run into this before. I remember from the recordkeeping days, we would never have made a distribution without a current valuation, especially with a market such as it was at that time. Plus, I know the plan participant's tax consequences will need to be corrected also if he is required to pay these funds back.

Thoughts anyone?

[K2retire]

It is usually standard procedure to make a payment during 2008 based on the 12-31-2007 account balance in an annually valued plan. Have they given any basis for the request for repayment, such as the plan calling for distribution after the end of the plan year of termination?

[Bird]

That's a decision (to do a special valuation) that should have been made at the time the funds were paid out. The onus is on the Plan Administrator and/or Trustee to explain why the money should come back now. As noted, if the payment was made before the plan would otherwise allow it, that might, just might provide some basis for requesting the money back. Also note that most of the damage came in the fall of '08; when did the participant get paid out (and if it was late in the year, was the Plan Administrator really that stupid to just pay out a [presumably] large share of the plan without considering the consequences?)

[Guest Bizitchie]

I have received more information. Participant actually terminated the last week of December, 2008. CPA/TPA wrote a letter to the ER/Administrator to make distribution to the participant in Feb, 2009. Employer sent distribution forms to participant, participant completed, received distribution, then CPA/TPA prepared 2008 annual valuation. Employer/Administrator is now requesting funds back and has filed a lawsuit against participant. This actually involves 2 participants. I think it was very dumb of CPA/TPA to instruct a distribution to be made, when he had not prepared the 2008 valuation.

[Guest dbvail]

Not for nothing, but what does the document say? Is payout based on valuation at end of year following request or end of year following termination etc?

The document will provide guidance no matter what the CPA says. Just a thought.

[Bird]

Well that's just a bad job. I think the PA has a case to recover the money since the payout was indeed incorrect. How that's done, I dunno; my job is to keep things from getting screwed up, not fixing them.

[mbozek]

If the participant has spent the distribution the plan will not be able to get it back. Also the plan has to identify the distributed funds that are in the participant's possession.

Minor Q- Under the plan if the participant terminated in 2008 what year's valuation is used to determine the value if payment is made in 2009? 2007 or 2008?

[Guest Bizitchie]

If the participant has spent the distribution the plan will not be able to get it back. Also the plan has to identify the distributed funds that are in the participant's possession.

Minor Q- Under the plan if the participant terminated in 2008 what year's valuation is used to determine the value if payment is made in 2009? 2007 or 2008?

As to the Minor Q - I had the same idea, but SPD did not address and participant did not have a copy of the adoption agreement. I was able to identify it was a Corbel/PPD doc, but I know this doc does have the different options to choose, so I don't have this answer. Participant has spent the funds to build an addition to his home for handicapped child, so he no longer has liquid funds.

[mbozek]

If the participant has spent the distribution the plan will not be able to get it back. Also the plan has to identify the distributed funds that are in the participant's possession.

Minor Q- Under the plan if the participant terminated in 2008 what year's valuation is used to determine the value if payment is made in 2009? 2007 or 2008?

As to the Minor Q - I had the same idea, but SPD did not address and participant did not have a copy of the adoption agreement. I was able to identify it was a Corbel/PPD doc, but I know this doc does have the different options to choose, so I don't have this answer. Participant has spent the funds to build an addition to his home for handicapped child, so he no longer has liquid funds.

I think this presents the plan with a quandry because under rules of equity only the funds from the plan actually in the possession of the participant when the action commences can be recovered in the event of an overpayment. If the distribution was used to build an addition to the home the plan's interest will be subject to the interest of a bank holding a mortgage. I dont know if the plan's interest in the excess amount could be traced to the home addition. I dont know if the plan's interest (if any) could be enforced as a lien on the home that would be paid when the home is sold. Even if the plan's claim is a valid lien the plan would be the last creditor to be paid.