Impermissible Distribution

[oldman]

An age 59-1/2 distribution was erroneously processed from a money pruchase plan. Request was made for participant to return distriubtion amount plus earnings, but participant refused. To make plan whole, employer would then have responsibility to restore funds to plan. Such monies would then be placed in forfeiture account to be applied as a credit towards future contributions. At first , it appeared that this would be a windfall for employer, but in making contributions to plan, employer would not be claiming deduction on the restored monies. For example, restored amount in forfeiture account equals $10,000, employer required to make contribution of $100,000, so employer submits net deductible contribution of $90,000. (Note plan's normal retirement age is 62, so classifying the withdrawals under the new NRA rules wouldn't apply)

Would this correction be appropriate in remedying the situation?

[Bird]

I may be missing something, but I don't understand why the employer would be making a deposit/contribution to the plan - the only fix that I can see is to get the money back, and if the participant refuses, document it. Is the forfeiture account deposit something that is IRS-sanctioned?

[BG5150]

Bird, it comes from EPCRS (Sec. 6.06(3)):

(3) Correction of Overpayment failures. An Overpayment from a defined benefit

plan is corrected in accordance with the rules in section 2.04(1) of Appendix B. An

Overpayment from a defined contribution plan is corrected in accordance with the Return

of Overpayment method set forth in this paragraph. Under this method, the employer

takes reasonable steps to have the Overpayment, plus appropriate interest from the date

of the distribution to the date of the repayment, returned by the participant or beneficiary

to the plan.

To the extent the amount returned to a defined contribution plan is less than

the Overpayment adjusted for earnings at the plan's earnings rate, then the employer or

another person must contribute the difference to the plan. The Overpayment, adjusted for

earnings at the plan's earnings rate to the date of the repayment, is to be placed in an

unallocated account, as described in section 6.06(2), to be used to reduce employer

contributions (other than elective deferrals) in the current year and succeeding year(s) (or

if the amount would have been allocated to other eligible employees who were in the plan

for the year of the failure if the failure had not occurred, then that amount is reallocated to

the other eligible employees in accordance with the plan's allocation formula).

In addition,

the employer must notify the employee that the Overpayment was not eligible for

favorable tax treatment accorded to distributions from Qualified Plans (and, specifically,

was not eligible for tax-free rollover).

(bold and spacing are my emphasis)

[Bird]

Bird, it comes from EPCRS

Thanks, I learned something today...I can't say that I see the logic in it but...whatever.

[K2retire]

"IRS" and "logic" don't necessarily belong in the same sentence.