Distribution Buy Back or Restoration

[Mr Bagwell]

We have an employee that took a cash distribution early in 2017.  Employee has since been rehired and wants to restore her account as there was enough non vested monies forfeited to warrant the restoration.

I'm all good with the employee sending back the entire amount and us restoring her account.  No real problem there.

My question is really for me as I am curious.   What about the 20% withholding already done on the cash out?  A 1099-R will be sent on the cash out.  How does the employee rectify or "get back" the withholding?  I'd assume at tax filing of her 2017 taxes, but I don't know.  Maybe she doesn't get the taxes "back"... 

Just curious.

[ESOP Guy]

Obviously, she gets credit for the withholding when she files on her 1040. 

The real question is how does this person account for the money paid back to the plan?  Is it after-tax money with a basis or not?  After all she is paying money back to the plan that has been taxed once already does she pay taxes a 2nd time?  It has been a long time since I did this when the person took a taxable distribution and then actually paid it back.  I have seen way more pay backs when the person put it in an IRA and then took the money from the IRA and sent it back to the Qualified Plan.  But something in the back of my mind says in this case she pays taxes on the distribution and you now have to track a basis.  I am willing to be told I am wrong on this as it has been a very long time!  If that is true then she pays taxes now on the distribution so in a sense doesn't get her withholding "back" if I understand your question.  But she doesn't pay taxes on that money again in the future either.  You might want to do more research on if this money has that basis or not.

 

My guess is if I am wrong someone here will gladly tell us I am wrong.

[Mr Bagwell]

Thanks ESOP.

This is weird.... and you don't see a lot of these to file away in the permanent file.  Our team of 7 has seen one restoration in all our experience....lol.

The Plan says The Plan Administrator will account for a Participant's restored balance by treating the Account as consisting of the same Contribution Types and amounts as existed on the date of the Cash-Out Distribution.  Does this mean that Pretax goes back to Pretax and Profit Sharing back to Profit Sharing?  

But, basis tracking has been thrown around many times when reading the boards about the subject. If we have to go the after-tax route and basis tracking, we would have to track the combined amount of original pretax and profit sharing.  Correct?

[Tom Poje]

that would be my understanding, anything the participant pays back  (if not from an IRA rollover), including the 20% withholding would be 'tracked' as after tax.

ERISA Outline book points out with the change to the regs years ago, the pay back should include deferrals as well

[Mr Bagwell]

I could not find the subject in the ERISA Outline book.   I looked under Distributions, but to no avail.....

Can I get guidance on the section?

Thanks

[Tom Poje]

I used random luck, trip across method to find such things.

 

but that luck discovered it in Chapter 4 Section VI Part A.2.b  - provides some info, not a lot.

I don't think it mentions tracking as after tax, but that only makes sense to track $ that way in most cases (I may be a Grinch but I'm not that cheap). since you mentioned there was 20% withholding that implies no IRA rollover anyway.

[Mr Bagwell]

Thanks, Grinch!

[ESOP Guy]

4 hours ago, Mr Bagwell said:

Thanks ESOP.

This is weird.... and you don't see a lot of these to file away in the permanent file.  Our team of 7 has seen one restoration in all our experience....lol.

 

When I said I have seen "way more" payments back from IRAs vs taxable payments it might be something like 5 to 7 vs 1.  So my experience isn't very large either.

It is just with the money in an IRA the person at least has the money to pay it back.  If the person took a taxable distribution that money is gone by the time they get rehired and their desire is moot. 

[JamesK]

You may want to search for either Code section 411(a)(7)(C) or Treas. Reg. 1.411(a)-7(d)(4) to see if any secondary sources discuss the basis issue.  In fact, I would discuss this with the participant.  She would not want to pay tax twice on the same distributed amounts.  On the other hand, the IRS would want you to make sure she has paid the tax at least once.  

My hazy recollection is that a friend of the firm repaid amounts to his employer's plan but they may have come from his own funds and were treated as after-tax amounts.  So it may be possible since the Code and regulations don't appear to prohibit such a repayment.