Employer Pays Distributions, Plan Reimburses Employer

[mming]

A prohibited transaction, no? The immediate issue is whether or not to file 1099s - we're leaning towards not doing them since it wasn't the plan that paid the terminated participants. Luckily it was for a small amount ($300 between 2 participants, both under $200 apiece in a plan with about 40 lives). Technically, I suppose a 5330 s/b filed (perhaps guaranteeing an audit) and an IRS correction program should be used (is self-correction permissible for this?), but as a practical matter I can't imagine plans go through all this for the amount in question. What's the best way to handle this, especially the 1099 situation?

[QDROphile]

Consider if this can fit into PTE 80-26. You still have to recon with actual payment by the employer rather than the trust, which is not in accordance wtth plan terms and not what one expects for cash flow if the employer loaned the funds to the plan for payment of the benefits.

[mming]

not what one expects for cash flow if the employer loaned the funds to the plan for payment of the benefits.

Right - this would seem to make the PTE n/a in this case. I imagine another option may be for the ER to refund the plan for the reimbursement and have the plan pay the participants - yes, they would get paid twice, but at least the amts are small and the distributions would be made correctly. Do you think this would fly if the refund is made with interest within a year? The doc's "mistake of fact" provision only addresses return of contributions and is silent on erroneous payments.

[Belgarath]

Aside from the other issues, I'm just curious - did the employer do proper withholding and reporting? What if someone wanted a direct rollover, etc...

[masteff]

both under $200

Under $200 can be denied both withholding and direct rollover, correct?

Personally, I'd use QDRO's suggestion and apply 80-26 to this, thus making it the plan who issues 1099-R's to the participants.