Age 70 1/2 Distribution

[DP]

I have a PS/401k plan where there is an elderly lady, age 78, still actively employed. She is not an owner of the business.

Their plan allows anyone over the age of 70 1/2 and still employed to waive the Age 70 1/2 required distribution until they terminate their employment.

Last month the broker who handles the investments told this lady that she should have been taking minimum distributions every year. He had her sign paperwork to take out a taxable distribution of around $10,000. Then he rolled over her remaining balance, around $200,000, to an IRA. None of this went through me as the TPA.

This lady has no immediate plans for retirement, is still receiving PS contributions, and does not want to cash in her PS/401k account.

Now that her PS/401k balance has been rolled over to an IRA, she no longer can waive taking her minimum distributions each year. Would the best suggestion be to rollover this balance from her IRA back into her PS/401k plan?

Any other suggestions?

[QDROphile]

Reverse everthing to the extent funds are available. Do not recognize the legitimacy of what happened by taking any action (such as a subsequent rollover). Treat this as a correction, not as a plan B recovery. File amended reports and tax returns. Report the broker to the appropriate regulatory body.

[Kevin C]

I read the OP as saying the participant was eligible for the in-service distribution and completed the necessary paperwork for the distribution. What justification would the plan have for a "correction" if the plan did nothing wrong?

If a 1099-R gets changed to lessen the participant's tax liability simply because the participant changed her mind, I would be afraid the paid preparer penalties might apply.

Unless the plan actually did something incorrect, I think the best option is for the participant to roll her IRA back into the plan. If she gets the funds replaced within 60 days of the distribution, she can also do a 60 day rollover of the amount she received directly. It wasn't an RMD, so she has the 60 day rollover period.

[QDROphile]

I assume that the poster is certain of facts and wants the optimal result, which could not be achieved by cycling the money via rollover. If you can get all the money back in the plan conventionally, then I agree that extraordinay actions should not be taken. You point out some of the questions that must be answered before taking the agressive approach. I agree that a change of mind will not justify the extraordinary action and the plan administrator has to be wary. I think the plan can accommodate remedial actions for a victim of fraud, even though the formalities of communication with the plan were conventional. If they don't have enough hair (or the right facts) to conclude it was fraud and take actions accordingly (including reporting the broker), then they should follow plan B and live with the outcome. People ask for ideas in this forum. The counterpoints provided by other members of the community provide balance and perspective, lest anyone think they are getting fully baked advice.

[GMK]

What justification would the plan have for a "correction" if the plan did nothing wrong?

What's not wrong about the plan broker's telling this lady that she should have been taking minimum distributions every year in clear contradition to the terms of the Plan Document?

But maybe there's more to it.

[Kevin C]

Unless the broker is also the ERISA Plan Administrator, I don't see how his incompetent advice means the Plan did not follow the terms of the plan in making the distribution. He didn't force her to take a distribution, he talked her into requesting one. I do like QDRO's suggestion to report the broker. Which agency would you report him to?

We have participants who get and follow bad advice from others on a regular basis. It may be a QDRO distribution rolled to an IRA and then quickly withdrawn by an alternate payee under 59.5. Or, a rollover to annuity products with huge fees and large surrender charges. Call me heartless if you want, but I'm not going to make it our client's problem when a participant does something they regret with their distribution. I'm not saying you shouldn't try to help her, I just wouldn't turn it into a problem for the plan.

Maybe there is more to it.

[GMK]

I'm not going to make it our client's problem when a participant does something they regret with their distribution.

I'm with you all the way on that, as long as the plan informed them of their options.

My point is that the plan is not a completely isolated bystander. The plan is responsible for its hiring decisions and has a responsibility to educate the hired people regarding the terms of the plan to the extent that the terms apply to what the hired people do for the plan. Now, if the plan's broker knew the rules and gave alternate advice, then it gets interesting.

I wonder if the broker made any money on the rollover. Or maybe it was all just an innocent mistake.

[Kevin C]

I wonder if the broker made any money on the rollover.

This one needs one of those smiley faces.

The distribution paperwork is supposed to inform the participant of the available optional forms of payment. The tax notice informs her of the tax consequences of her distribution. Is there anything else you consider an option that has to be disclosed before the distribution gets paid?

I agree the plan should consider whether they want to continue to use this broker. But, isn't that generally a Trustee decision, instead of a Plan Administrator decision? It may be the same person wearing different hats, but we don't know that for sure.

[GMK]

OK.

I wonder if the broker made any money on the rollover.

In the OP, the distribution itself was probably made correctly. The reason for taking the distribution, however, was based on faulty (or worse) advice from the plan's broker that the lady did not have the option to waive RMD's under the terms of the plan. I'm pretty sure this option isn't usually discussed on the distribution form and tax notice. But I'm just speculating here.

[masteff]

Is the broker a fidicuary in this scenario?