Improper distribution

[Bird]

Participant had a self-directed account for 401(k) money at Vanguard, became disillusioned for a lot of reasons that I won't get into, and somehow just took the money out; probably with the plan sponsor signing off without our knowledge or input...actually in direct contradiction to our input, but anyway...

I don't believe there was any withholding, and I'm going to assume for now that the participant has the money.

I'm being completely lazy and not even trying to find a fix in VCP; is there one that anyone knows of? Does it matter if the participant is able or unable to repay the money? It's a 5/31 fiscal year and the transaction occurred before the end of the year so it's an open item.

[movedon]

Well, you can't top me in the laziness department, so I'm working from memory here and not from any actual looking...

Seems like the first thing the plan would do is ask for the money back. Assuming the guy says no (and that the money wasn't rolled somewhere from whence it can be retrieved), I guess then the plan should issue a 1099 and head on down the road. Wouldn't make sense for the employer to put money in the plan to "restore" the plan, since it's an individual account type plan - that would be a windfall to the participant. Can't go back and withhold on the distribution since the money is already gone (and it might not be an eligible rollover distribution, anyway). I think this could be done via self-correction.

Is there a retroactive amendment that could be adopted to make the distribution OK - some kind of in-service distribution or loan provision? That might technically be a VCP solution, although if it happened during the current plan year, maybe the amendment could be dated the first day of the current plan year as a discretionary amendment?

[BG5150]

Was this person an HCE?

[Bird]

Not an HCE. I learned that we might be able to call it a hardship and will probably try to go in that direction as there are procedures for that.

thanks for the feedback.

[BG5150]

Gonna be tough to justify a hardship if his deferral account value was more than what his deferrals were.

[masteff]

Gonna be tough to justify a hardship if his deferral account value was more than what his deferrals were.

Unless you combine it w/ an in-service (possibly via a retroactive amendment).

I don't know if was just a plan rule or result of old IRS rulings/regs/etc, but we had an old thrift plan that had a "complete" withdrawal which could only be done once every 5 years.

[Guest Sieve]

If not hardship, & participant not 59-1/2, how can you just ignore elective deferral distributions? if you do, you head down the road with a disqualified plan. I don't think there is a specific VCP correction for that--you just through yourself on the mercy of the IRS.