Premature distribution to NHCE, loan? hardship? No paperwork. APRSC, V

[Guest John Dunwoody]

A 401(k)/profit sharing plan of a sub-S made a distribution of $34,000 in March 1999 to NHCE at his "urgent" request with only verbal discussion of taxes & penalties by Trustee (intended as hardship?) but no paperwork at all either for loan (no provision in plan), in service distribution (no provision in plan), hardship (in plan), etc, money was just paid out. No taxes withheld, no reporting on 1099(yet!). We found the transaction last week when working on 12/31/99 val. Also, a normal retirement participant and termination of employment participant was processed without paparwork in 1999. Plan otherwise has been in complete compliance. In retrospect, if catagorized as a hardship, maximum was $18,000 (employee deferrals only). No attempts at repayment by payroll deduction, etc, in fact, participant continued to defer pre-tax, while employed under age 59 1/2. Plan assets $2,000,000. Most concerned about qualified status of plan, less concerned about impact to participant. Is this APRSC? VCR? Walk in CAP?

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[Guest John Dunwoody]

We're responding to our own questions. We 1099'd and had participants sign distribution paperwork after the fact. We then filed with VCR and had an extremely favorable response from this. Decision was to try to get participant to repay the $34,000 and there would be no penalties to either participant or sponsor. And if the participant wouldn't pay back then he would just pay taxes and regular penalties on his personal taxes. Call us for details if you have a similar case. 248-546-3800 x22

[R. Butler]

Thanks for letting us know the outcome. Do you think the same course of action should be taken if an HCE erroneously received a corrective distribution. We have a takeover plan where the prior administrator did not run the ADP/ACP test correctly. Corrective distributions were made based on the "bad" test. In reality the test passed.