Failure to obtain proper Distrib. Elections and Consents

[Earl]

If a Trustee is leaving a company. He rolls over his account without completing the Election of Non-Annuity Form of Payment. He is advised and won't sign, even after the fact. Why annuity rights are in a 401(k) I don't know, but they are. The guy is married.

Then the IRS audits the plan.

What do you think would happen? We are documenting the requests and everyhting but the guy is an ass.

I think the IRS would look to the sponsor with regard to any fine. Would then the sponsor have recourse against the Trustee for malfeasance in office?

[KIP KRAUS]

Earl:

This seems to need some clarification, or maybe I just don’t get it. Are you saying that this person was an employee/participant of the 401(k) of which he was also a Trustee? If so, how was he able to do a rollover without signing the Annuity Waiver Form?

Sounds like a breach of fiduciary responsibility, if he did this on his own signature as a Trustee.

[Guest 1950]

If the guy was an employee and a trustee and took the money without giving the proper consent (and his spouse's), then here are a couple of thoughts. Was he also the plan administrator, or was he just a trustee? If the former, then maybe he just wasn't doing his job, and maybe you could sue him for any loss he causes under a contract theory. Seems like an easier case than fraud, for example. If he was a trustee and was not responsible for giving employees notices, getting consents, etc., then it seems he breached his fiduciary duty and you have a claim against him for that, maybe even fraud. Or better yet, maybe you could get the fidelity bond carrier to cover it and send them after him to recoup.

As to what the IRS will say: See Rev. Proc. 2000-16, Appendix B, section .07. Generally, the fix for making a lump sum distribution to a participant without getting the proper consents under 401(a)(11), 411(a)(11) and 417 is: (1) ask for the consents and if you get them, you're ok, (2) if you don't get them, then you're stuck for the spouse's portion. The Rev Proc says you figure out the normal form of benefit -- e.g., J&S with 50% survivor. You get to treat the participant as fully paid out, so you won't owe him anything, but you have to provide the survivor annuity for the spouse. If he dies first, after his death she has to get annuity payments = 50% (in the example) of what would have been paid during his life. Very ugly, but I bet that's what the agent is going to require.

[Earl]

Thank you for your replies. They are in line with my thinking...espcially the spouse is still due the annuity...

To be clearer: Individual is the owner of the company. The company is the named administrator so, as I understand it, the duty passes to him as corporate officer. The individual is a co-Trustee as well as a Participant.

Mutual Funds executed his order having been signed by him as Trustee of the Plan.

[KIP KRAUS]

This sounds even goofier. He's the owner? How does he have a qualified distribution before he leaves the company? Sounds like he gave himself a distribution before he left the company. If so, that would probably be contrary to plan provisions. Sick the DOL on him.

[Earl]

1. His has left but amended the plan so that 1000 hrs gets a cocntribution so he is still worried about control.

2. I have no life.

[david rigby]

Is he over the plan's defined NRD? If so, does the plan permit an in-service distribution to participants in this case?