Direct distribution changed to rollover

[jpdrews]

A participant requested a direct distribution. Thinking she was executing a rollover, she forwarded the check to her new employer's plan. After back and forth with the new employer plan to deposit the check, she's calling the old employer plan stating she wanted a rollover in the first place. According to the participant, the new employer plan has taken so long to act and return the original distribution check, the 60 day rollover window is about to expire.

The recordkeeper is willing to void the direct distribution and issue a new distribution as a rollover. To do this, they want a letter from the trustee of the old employer plan stating this was an "error at the participant level and please correct the distribution as a rollover".

I'm the advisor to the old employer's plan. My question, is the trustee of the old employer plan putting themselves or the old employer plan at risk with the IRS to write a letter requesting the distribution be redone as a rollover?

Thank you for any thoughts

[david rigby]

It depends. Who made the error?

Really, the answer might not be so obvious.

[jpdrews]

I contend the error was the participants. The participant is claiming they were told by my office to complete the form as a direct distribution. We have notes in our system from the call, but they are incomplete. Given the number of transactions my staff handles I don't think she would be told to complete the form as a direct distribution, but I guess anything's possible. Not sure if that info helps.

[QDROphile]

Not really a direct response to your question, but the error was communication with the participant. Because rollovers are so confusing and susceptible to changing minds, disclosure is prescribed and dialogue or assistance beyond delivery of the disclosure and a competent election form reverts everyone to the bad old days of mind reading and misunderstanding. Under ERISA, one lives and dies by the formalities.

[QDROphile]

By the way, competent disclosure/election forms will warn a participant to confirm with the new plan that the new plan will accept rollovers (direct or indirect). Bumbling by the new plan or the participant is not the distributing plan's concern.

[Belgarath]

See if Rev. Proc. 2016-47 helps.

[GMK]

Out of curiosity, does a plan that accepts direct rollovers have the option to refuse "60-day" rollovers?

[RatherBeGolfing]

Out of curiosity, does a plan that accepts direct rollovers have the option to refuse "60-day" rollovers?

I would think so. Most documents I have read include some type of language giving the plan discretion. So as a matter of plan policy you should be able to refuse 60-day rollovers as long as you are consistent.

for example, my document states:

The Plan Administrator has discretion under Section... to limit the types of rollover contributions accepted by the Plan and must use that discretion in a consistent and nondiscriminatory manner.

[jpdrews]

Thank you everyone for the input. After further dialogue with the participant it sounds like they misunderstood directions they received from the new employer plan recordkeeper. Sounds like she's been struggling to get the check back from the new employer plan recordkeeper. As QDROphile states...not the old ER plan's concern. But Trustee was just wondering if they could do the participant the favor of reissuing as rollover since it seems clear she wanted a rollover from the start.

[jpod]

I don't understand why it might make a difference that it was X's fault as opposed to Y's fault. How do you put the genie back in the bottle to avoid a taxable distribution and a blown 60-day rollover?

[jpdrews]

Thank you jpod. I think we'll have trustee hold firm with the original distribution. Best.

[Bird]

Just curious if there was withholding...

[jpdrews]

Yes the old employer plan withheld taxes. Old ER plan recordkeeper said they could go get the taxes back from the IRS should the ttee decide they wanted to redo the distribution request as a rollover. Since 1099's havent been sent, recordkeeper is saying they would void the first direct distribution check, recall the taxes from the IRS, issue a new rollover check payable to new ER plan, and issue 1099 in 2017 showing as rollover instead of direct distribution.

[Bird]

mmm, interesting. I think you're wise to stick with the original distribution as it occurred.

[ESOP Guy]

Yes the old employer plan withheld taxes. Old ER plan recordkeeper said they could go get the taxes back from the IRS should the ttee decide they wanted to redo the distribution request as a rollover. Since 1099's havent been sent, recordkeeper is saying they would void the first direct distribution check, recall the taxes from the IRS, issue a new rollover check payable to new ER plan, and issue 1099 in 2017 showing as rollover instead of direct distribution.

What you describe there I see all the time.

We even do it at my current job. Basically void the check and its a do over.

[jpod]

ESOP Guy: Not trying to be Debbie Downer here, just curious. If the IRS or some other interested party asked for the legal justification for doing this, what would be the response? If the answer is "we do what the Plan Administrator directs us to do," that's not exactly the kind of answer I am looking for.

[ESOP Guy]

jpod I am not sure what my answer would be.

I also think that it would be nearly impossible to detect it happening. We typically get a new form or some other written instruction from the person. I have also found that IRS agents don't tend even look for this. They see there is a 1099-R. The sum of them equals the distributions that came from the trust as they rarely go so far into the weeds to see the in/outs. We can produce forms if asked which is rare.

So do I have some complex legal answer? No, but I do see what was described above all the time as a practical matter.

[ESOP Guy]

I would add while the OP is looks like mere mistake or preference is cause of the change I have seen others that as a practical matter are bigger problems.

I had a situation recently where we had a check cut and it turned out that something had changed at the rollover institution between the time of the request and the check cut. ESOP distributions can be a little slower then 401(k) payments. It turned out the check wouldn't be cashed by the rollover institution. Obviously since the check wasn't made out to the person they couldn't cash it. (Although it is amazing how many times I have seen a rollover check get deposited into a personal account)

So what are we supposed to do just leave this person with a check that has no value?

You could reply as long as the new payee was another rollover institution there is no tax effect but it isn't clear the objections raised here are merely taxable issues.

I guess what I am saying is this conversation is one of those "its great in theory to say this is the law but I can find plenty of times where the law just didn't seem to account for what can happen" conversations.

To be clear like I said at the beginning I am NOT claiming ever case is a hard case but there can be plenty of them also. As I said in my prior comment nor do we merely limit what we do to the hard cases so if one wants to accuse me of rationalizing so be it.

[K2retire]

Yes the old employer plan withheld taxes. Old ER plan recordkeeper said they could go get the taxes back from the IRS should the ttee decide they wanted to redo the distribution request as a rollover. Since 1099's havent been sent, recordkeeper is saying they would void the first direct distribution check, recall the taxes from the IRS, issue a new rollover check payable to new ER plan, and issue 1099 in 2017 showing as rollover instead of direct distribution.

What you describe there I see all the time.

We even do it at my current job. Basically void the check and its a do over.

I've worked places that did this also. It always made me uncomfortable, even though it often solved problems.

[jpdrews]

Thanks everyone for the additional input. After more discussion with the participant, she confirmed she was confused by the direction on completing forms provided by the new ER plan recordkeeper. ESOP Guy you're point re the 1099's is probably true. I figure since the IRS would be receiving only one form 1099-R showing a rollover (assuming the transaction was voided and redone as rollover) they would never know what transpired. Given the size of the plan they'd also have to really get into the weeds on an audit to figure out what happened.

My concern has simply been I don't feel comfortable having the old ER plan ttee involve themselves since it now appears to be an error in communication/instruction on the side of the participant and new ER plan recordkeeper.