Participant took in-service w/d before 59.5, what now?

[BG5150]

Plan allows for in-service withdrawals at age 59.5 for deferrals and SH, and PS at NRA.

Participant was told she could take an in-service withdrawal from the plan.  She was not told about the age requirements.

She took a $100k distribution from the brokerage account in September 2020, and a 1099-R was issued.

Problem is, she is only 35.

Can we retroactively amend to allow in-service w/d from Non-Elective contributions at age 34?

I see in EPCRS you can do that for hardships and loans.  Nothing about "regular" withdrawals.

If not, what's the correction?  Return the money and reverse the 1099-R?

[pmacduff]

Any chance it could be classifed a COVID withdrawal?  It sounds as thought that might have been the thought process if it was for $100k.

I don't recall if those had any source restrictions though.

[BG5150]

She rolled it over.  Are COVID distributions allowed to be rolled over?

[MoJo]

I believe EPCRS provides that in the case of a distribution without a distributable event (what you have here), you ask for it back.  If they send it back, put back in their account.  If they don't, and it's money they would have been able to receive with a distributable event, the plan is considered good to go.  No further action necessary.

However, I don't believe that is rolloverable (at least to the best of my recollection) so the 1099 has to indicate as such, the participant now has an excess contribution into their IRA, with the 6% excise tax (each and every year until it is corrected).

[Bill Presson]

But won't this apply if it's a COVID distribution?

Q7. May I repay a coronavirus-related distribution?

A7. In general, yes, you may repay all or part of the amount of a coronavirus-related distribution to an eligible retirement plan, provided that you complete the repayment within three years after the date that the distribution was received. If you repay a coronavirus-related distribution, the distribution will be treated as though it were repaid in a direct trustee-to-trustee transfer so that you do not owe federal income tax on the distribution.

If, for example, you receive a coronavirus-related distribution in 2020, you choose to include the distribution amount in income over a 3-year period (2020, 2021, and 2022), and you choose to repay the full amount to an eligible retirement plan in 2022, you may file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that you included in income for those years, and you will not be required to include any amount in income in 2022. See sections 4.D, 4.E, and 4.F of Notice 2005-92 for additional examples.

[rocknrolls2]

Here are my thoughts on the matter.

At the outset, BG150, I am inclined to agree with Pmacduff that the amount may have qualified as a Coronavirus-related distribution, in which case there is not improper distribution. If so, such an amount can be rolled over and there would be no problem. As a Coronavirus-related distribution, it could either be repaid or not within the three-year period. The fact that the plan was not yet amended should be of no moment since there is a remedial amendment period for the plan to adopt such amendment retroactively.

Alternatively, the facts you provided did not indicate the sourcing of the amounts withdrawn (i.e., whether the withdrawal was paid from elective deferrals, safe harbor match or nonelective contributions or from profit-sharing contributions). I know that you said that the plan allows profit-sharing contributions to be withdrawn at normal retirement age. Profit-sharing contributions can also be paid at the earlier of two years (but only with respect to such contributions made more than two years before they were withdrawn) after they were made or after the participant has participated in the plan for at least five years. Another option might be to do a retroactive amendment to allow such a withdrawal. However, on balance, I think the Coronavirus-related distribution is the safer path to follow.

[cathyw]

I had a client who was transferring his profit sharing plan account to a new broker and filled out the forms incorrectly.  Instead of setting up a qualified plan account, the broker set up an IRA.  But the plan didn't provide for in-service distributions.  We prepared a retroactive amendment to allow in-service after 5 years of participation and filed a VCP application.  IRS approved without any questions.

[austin3515]

This was a long time ago but there was a plan we were involved in that permitted an in-service distribution when they were not eligible.  The correction (accordign to the ERISA attorney) was for the employer to deposit the amount of the ineligible distribution to a suspense account?  I did not look back through EPCRS to see where that was referenced. 

Thankfully, the employer contributions consumed the "suspense" account so it was more of an advance funding for money they were going to spend anyway. 

Anyway perhaps that correction is no longer in EPCRS but thought I would mention it.

[BG5150]

From EPCRS 6.06(4)(a):

Quote

(f) Other correction methods. Other appropriate correction methods may be used to correct Overpayment
failures from a defined contribution plan. Depending on the nature of the Overpayment,
an appropriate correction method may include using rules similar to the correction method in section
6.06(4)(a) but having the employer or another person contribute the amount of the Overpayment
(with appropriate interest) to the plan instead of seeking recoupment from a plan participant
or beneficiary. Another example of an appropriate correction method includes a Plan Sponsor
adopting a retroactive amendment to conform the plan document to the plan’s operations (subject
to the requirements of section 4.05). Any other correction method used must satisfy the correction
principles of section 6.02 and any other applicable rules of this revenue procedure.

 

But I guess I have to use VCP.

[BG5150]

Update on the facts:

The distribution was for $220,000.

There was no money source (yet) as the money is in a brokerage account for the participant.  The brokerage does not separately record keep the sources; we do that annually.  She had enough funds in the PS account at BOY to support the distribution.

I believe the money is still in the IRA, so re-payment may still be possible.

 

 

[Appleby]

On 4/1/2021 at 2:28 PM, BG5150 said:

She rolled it over.  Are COVID distributions allowed to be rolled over?

Yes. But there might be another issue:
Does not the plan allow for Coronavirus related distributions (CRD)s. If yes, and she is a qualified individual, then the $100,000 can be rolled over within 3 years of receipt.

If the plan does not allow for CRDs and she was eligible to make the withdrawal, it can still be treated as a CRD if she is an qualified individual .

CRDs are capped at $100,000 per person. ( I see from your update that the amount is over that. Assuming she is eligible, only $100,000 of the amount is eligible to be treated as a CRD.

[Appleby]

On 4/1/2021 at 2:28 PM, BG5150 said:

She rolled it over.  Are COVID distributions allowed to be rolled over?

Yes,definitely as a 60-day rollover. It does not appear that a CRD would be processed as a direct rollover .

[Appleby]

On 4/1/2021 at 1:08 PM, BG5150 said:

Plan allows for in-service withdrawals at age 59.5 for deferrals and SH, and PS at NRA.

Participant was told she could take an in-service withdrawal from the plan.  She was not told about the age requirements.

She took a $100k distribution from the brokerage account in September 2020, and a 1099-R was issued.

Problem is, she is only 35.

Can we retroactively amend to allow in-service w/d from Non-Elective contributions at age 34?

I see in EPCRS you can do that for hardships and loans.  Nothing about "regular" withdrawals.

If not, what's the correction?  Return the money and reverse the 1099-R?

Question: Was this approved by the plan trustee? A common compliance issue with brokerage firms is failing to get proper authorization for plan distributions.  If not, they might need to be reminded that the trustee is required to approve distributions, so that this does not re-occur.

[BG5150]

'Twas the trustee who too the distribution. 

The trustee was informed she could take an in-service withdrawal eligible for rollover.  Not by me!

So, the Ttee thought she was acting within the rules of the plan.

[jsample]

Participant is 35 years old with more than $220,000 profit sharing in her retirement plan.  I do not come across that very often, nice.  Sorry for the non-reply to the original question.

[BG5150]

11 minutes ago, jsample said:

Participant is 35 years old with more than $220,000 profit sharing in her retirement plan.  I do not come across that very often, nice.  Sorry for the non-reply to the original question.

High end boutique.  Around $250k in income every year.  Around $25-30k PS for 6 or seven years.  Plus earnings.

[Lou S.]

Retro actively amend to allow in-service withdrawals of profit sharing money at age 35 or more than 5 years of participation?

Might open the flood gates if there are other employee accounts to consider.

[BG5150]

24 minutes ago, Lou S. said:

Retro actively amend to allow in-service withdrawals of profit sharing money at age 35 or more than 5 years of participation?

Might open the flood gates if there are other employee accounts to consider.

Only a handful of other employees.

However, it only seems that a retroactive amendment is allowed via VCP.  Plan has $650k in plan assets, so VCP fee alone is $3,000.  Plus, our boss doesn't think we should prepare the filing.  (I would have no problem doing it.) So, add in an attorney's fee for doing it.

[jsample]

Would it be possible to re-register the IRA in the name of the plan, and then begin to track annually as an outside asset?  Although this would not solve the 1099R that was issued.

[ACK]

I agree with jsample. This sounds more like the participant just wanted to move her money to a brokerage account and self-direct it.  I would look at this from that angle..not as a distribution.. if there is a way to make that work.