Impermissible Distribution - Non-terminated participant / Brokerage Accts

[CLE401kGuy]

Plan has brokerage account setup where each participant works with his / her own broker (approx. 30 some different brokers working with about 50 participants) -

Non-terminated participant (a 30-something) - requested directly from his broker a distribution from his 4 plan - no distribution election forms were made, no other forms of distribution can be taken (hardship, loans, etc.) - so the participant was ineligible altogether from taking the distribution - never let the TPA or his company's HR know he was taking the distribution which was discovered on receipt of monthly brokerage statement cc'd to the TPA -

how do you correct under EPCRS - it's 1 person, $200k account in a $15MM plan - so relatively speaking it's insignificant... SCP and just get the money back? VCP and just get the money back? - and then if the money can't be returned (if it was used to buy a fancy speed boat) - does the sponsor just show they made reasonable effort to get the money back?

Thanks

[Lou S.]

It is correctable under EPCRS but I don't reall if it is eligible for SCP or you need to use VCP but I think it was one of the items address in the IRS phone forum not to long ago.

Either way if you are correcting via SCP or VCP you want to have the sponsor put n place porcedudes with ALL of those individual brokerage accounts that money can not leave with out written trustee approval, participants should not have authority to make withdrawals.

One other possible option if this is recent, does the Plan allow for loans and can you convert the "impermissable distribution" into a "participant loan after the fact"?

[GMK]

... porcedudes ...

google this, and you find that it's ERISA-speak for procedures.

[KJohnson]

You must try and get it back, but the IRS clarified in 2013-12 that you don't have to put in a make up contribution if they do not. You probably have potential withholding issues especially if the participant doesn't pay tax and the plan administrator doesn't withhold.

4) Correction of Overpayment (defined contribution plans and 403(b) Plans). (a) In general. An Overpayment from a defined contribution plan or 403(b) 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, adjusted for Earnings at the plan’s earnings rate from the date of the distribution to the date of the repayment, returned by the participant or beneficiary to the plan.

(b) Make-whole contribution. To the extent the amount of an Overpayment adjusted for Earnings at the plan’s earnings rate is not repaid to the plan, the employer or another person must contribute the difference to the plan. The preceding sentence does not apply when the failure arose solely because a payment was made from the plan to a participant or beneficiary in the absence of a distributable event (but was otherwise determined in accordance with the terms of the plan (e.g. an impermissible in-service distribution)).

© Unallocated account. Except as provided in section 6.06(4)(d), a corrected 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 41

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).

(d) Repayment by the participant or beneficiary. To the extent an Overpayment was solely considered a premature distribution but was otherwise determined in accordance with the terms of the plan, any amount returned to the plan by the participant or beneficiary is to be allocated to his or her account.

(e) Notification of employee. Except as provided in section 6.02(5)© with respect to the recovery of small overpayments, the employer must notify the employee that the Overpayment was not eligible for favorable tax treatment accorded to distributions from an eligible retirement plan under § 402©(8)(B) (and, specifically, was not eligible for tax-free rollover).

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