Does a rollover count as a repayment for forfeiture restoration purpos

[Guest Jane Francis]

Employee X terminates employment with Company Y and directly rolls entire account balance to new employer Company Z's plan. Employee X is rehired by Company Y a few years later, and Employee X rolls over his entire account balance from Company Z's plan, including the amounts initially rolled from Company Y's plan. Do these amounts count as a "repayment" of Employee X's account so as to entitle Employee X to a restoration of forfeitures?

[Jon Chambers]

Good question. My gut says yes, but you can't cite my gut. I'll be interested in responses from the attorneys out there. I'm assuming that your plan provides cash out/pay back language for forfeiture restoration, rather than an

"R x D" calculation.

[Bob R]

I'm not aware of any specific IRS guidance on this. But, I agree that you can use the rollover to buy back the forfeited amount.

[MoJo]

But if it is used to buy back the forfeited amount, it really isn't a rollover - it is rather a restoration, and hence would have to be accounted for as the originally distributed amount was - and not as a rollover. i.e. distribution options/timing may be different.

[QDROphile]

The plan document should specify. The plan may state that a rollover is not a repayment.

[Guest Jane Francis]

The plan document does not currently specify one way or the other. Shouldn't the participant have to specifically indicate the intention to use the rollover as a repayment?

[Jon Chambers]

Yes, that makes sense to me. Also, the repayment amount and rollover amounts are likely to be different, due to market value fluctuations. It seems that the repayment should be the original distribution amount, that could come from rollover funds, and, as MoJo noted, should be accounted for as if it were the original amount (i.e., vesting and in-service distribution restrictions would apply as per your plan), while the remaining amount of the funds to be "rolled over" (if any) would be treated in your plan as a rollover amount.

[RCK]

Last time we researched this issue, we came to the conclusion that the repayment had to be made with post -tax dollars. And that would leave the participant in the unenviable position of having a taxable distribution, a non-deductible repayment, and a second taxable distribution of the same amount. The plan in question was a DB plan, but I don't think that matters.

Didn't make sense to us, or the participant.

[Guest Jane Francis]

My initial reaction was like yours--after-tax money only for the repayment. But I cannot find a cite for that. Did you come across something concrete in your research?

[david rigby]

Ditto. My reaction is that repayments must always come from after-tax money.

[RCK]

I do not have a specific cite for the repayment with after-tax money position. All I can say is that it was the position of our outside ERISA counsel, and may have come from their tax department rather than their benefits department.

[MoJo]

I think we're getting confusing here. I agree the tax basis of the repaid amounts is positive - but in reality I think this money is to be accounted for as money of the same character as was distributed giving rise to the right of restoration - that is, it is subject to all of the restrictions and nuances of whatever type of funds was originally distributed, albeit it is plan money in which the participant has a tax basis - and should not be commingled with the typical "after tax" account which the plan may have (and which may have various in-service distribution option). From the perspective of a recordkeeper - this is not a good thing.

[KJohnson]

My reaction would be no based on the "type" of money. Say this is a money purchase pension plan where, while you cannot receive a "normal" in-service distribuiton, you can receive a distribution of your rollover account (assuming the plan provides for such)at any time.

Could a participant rollover the money into the Plan from a conduit IRA, claim repayment and restoration of the forfeiture, and the very next month (or day) take a distribuiton of his rollover account balance? Such a result would seem contrary to the whole concept of repayment or restoration. This transaction would really have no economic substance.

I like the idea of "segregating" the rollover into two amounts, a repayment amount and a rollover amount but I don't have any cites that would support such treatment.

[MoJo]

I disagre KJohnson - I think the money is not technically a "rollover" at all, although it follows the mechanics of one - it is in fact money that has once been taxed, and upon its return to the plan must have a tax basis. In addition - for it to be subject to the restoration provisions it must in fact be a "repayment" which implies it goes in with the character of the distribution, albeit with the tax basis.

[KJohnson]

I guess I am confused now. When was the money taxed? If it was rolled from one Plan to another Plan and rolled back to the original Plan upon reemployment it was never taxed.

Are you saying that the final "roll" would have to be segregated between a repayment amount (taxable) and a rollover amount (non-taxable). This puts the "away" Plan in a bind. How does it know that part of the requested rollover is actually a repayment? What is the withholding obligation of the "away Plan" on the repayment portion?

I think that the best result would be that no taxable event takes place and the Plan simply separates the "rollover" portion from the "repayment" portion. This distinction might be "invisible" if the Plan does not have more liberal distribution options for rollover accounts. However if it does, I wonder what a Court would say if you refused to let a participant have a distribution of a potion of an amount tendered as a rollover saying that it was actually a repayment? Also, I don't know of any authority for this type of segregation. Finally, if prior posts are correct and the repayment has to be with after-tax dollars this would not work? But I am not aware of any authority in 1.411(a)(7) that it has to be with after tax dollars unless you think that a rollover is not a repayment by "the employee."

[MoJo]

There is no requirement that a repayment amount come from rolled over funds. A taxable distribution can be "repaid" thereby triggering a restoration of amounts forfeited upon that distribution. And in this case, the reepaid amounts should have a tax basis. I don't believe it is incumbent on a plan which has the obligation of restoration to inquire as to the source of the funds being tendered as a repayment for restoration purposes - so if it comes from another qualified plan, there is no tracking obligation on the "away" plan to account for those funds any differently than it does for any other rollover. I think I agree with you that there is no authority that indicates that the repayment must be from previously taxed funds - hence rolloverable funds may fund a repayment - but I still think that once the funds are back in the plan, in order to trigger the obligation of restoration, the funds have to have the original character (albeit not necessarily the tax character) of the originally distributed funds. To think otherwise is simply not a "repayment" but rather a rollover, and it is only the act of "repaying" that triggers the obligation of the restoration.

[KJohnson]

Assuming that the repayment does not have to be with post-tax doallars, then I guess the prior posts had the right idea. Make the employee specify that a portion of the rollover is actually a repayment and inform the participant at the time of the rollover of the distinction between the two. This should provide you with some protection if the employee then ever wants to take a distribuiton from the rollover account. In cetain instances plan document issues might preclude such treatment, but if the Plan is silent this might be a reasonable way to harmonize the repayment and rollover provisions of the plan.

[MoJo]

Now I'm confused. I don't beleive there is a relationship between the rollover and the repayment rules. The only connection I see is that *IF* a repayment is funded with rolloverable assets, then the repayment is pre-tax. I think the assets lose character as rollover assets when used as a repayment. The repaid assets reacquire the status of the assets originally being distributed (i.e. pre-tax salary deferrals, or employer match, or employer profit sharing, etc.) and hence should not be account for as rolled over assets - but rather as assets of the type being repaid. Then, the repaid assets are once again subject to the distribution restrictions of that particular source of funds - or 401(k)(10)...

[KJohnson]

I guess the question is "who makes the call" on whether it is a repayment or a rollover without a specific plan provision.

If the money comes in the "form" of a rollover, I think that without a specific plan provision there may be a problem with automatically treating a portion of it as a repayment. However, if the employee and plan agree that $x are being placed into the account(s) from which you received a distribution and $x are being placed in a rollover account, then at least you have resolved any misunderstanding that may result.

[AndyH]

I agree completely with MoJo. I've struggled with this before in a DB plan. I haven't seen a document that specifies the source of the money (though I'm sure there are some).

The money being designated as a repayment takes on the properties of the initial payment (i.e. taxable and subject to the rules related to the original payment). I don't think it in any way is a rollover.

If it comes from pre tax money, then a 1099 should be issued by the financial institution from where it came, and that should be reported as a distribution (not a rollover) on the individual's tax return. If it's not a rollover, it's taxable. Same for a conduit IRA.

If it comes from after tax funds, I think it's taxable when paid out again. It still may be very worthwhile for a DB plan, or possibly any other plan if it restores a forfeiture, but makes no sense in other cases.

I don't think that repayment and rollover belong in the same sentence. It comes from whereever it comes from, but it's taxable when re-distributed. Just one opinion. I haven't found anything in print on this.

[KJohnson]

Andy H. Is it your opinion that a repayment has to be with post-tax dollars even if the original distribuiton or "cash out" was taken as a rollover? Also whose responsibility is it to "designate" money as a repayment? Finally, how does the "away" Plan or conduit IRA know that a portion of the money being transferred back to the original Plan is actually going to be used as a repayment for pupposes of its 1099 reporting (and presumably withholding).

I would think the typical situation would be that a partially vested participant terminates employment and takes a distribution from the Plan sponsored by Employer A. The employee rolls this over into the Plan sponsored by Employer B. Employer B probably has no idea that the employee was only partially vested in Employer A's Plan. After a few years the employee goes back to work for Employer A and rolls his money back to Employer A's Plan from Employer B's Plan. Once again, Employer B is probably unaware that this is anything other than a typical rollover. Plan A on the other hand has simply received a rollover from Plan B with no specific designation that part of this money is to be used as a repayment and no specific plan provision requiring the first dollars received to be used towards repayment.

1) If part of this money is going to be used as a repayment, whose responsibility is it to designate it as such? Is it automatic? Is it up to the participant? Is it up to Employer A's Plan Administrator?

2) Does the treatment of part of this money as a repayment change what would otherwise be a series of non-taxable rollovers into a taxable event for the participant? If so, how is Employer B to know for purposes of 1099's (and presumably withholding)?

[AndyH]

I would think that Employer A would have the obligation to determine what money is going into it's fund and what the nature of the money is. Employer A should require a written designation of what the money is for. It can't just accept money from any source without determining that it is acceptable under the plan.

If money is coming out of an IRA, wouldn't the employee have to sign some sort of withdrawal form, and as part of that form designate the nature of the withdrawal. I would think this would generate coding on a 1099, but in any event it is the employee's responsibility to claim it as income or as deferred income as a result of a rollover.

If the money is coming out of a plan of Employer B, Employer B would have withdrawal forms requiring a designation of where it's going and what type of distribution it is (i.e. direct rollover ), again resulting in a 1099 based in part on the employee's representation. But, again, the responsiblity is still on the Employee to declare the proper taxable income.

If the money comes from a person's checking account, I would think that the employee would need to inform Employer A that a certain check is a repayment. Otherwise, Employer A has no way of tracking the repayment for forfeiture restoration purposes.

I agree that the potential exists to bypass taxation by making misrepresentations, intentionally or not. But, that's where the fallback responsibility is, on the employee.

I would think that it doesn't matter to Employer A what the tax implications to the employee of the repayment, just the purpose of the money going into it's plan.

Just one opinion as a result of struggling with the same issues before. These were my conclusions.

[david shipp]

Here is the IRS response to a question on this issue from the 1996 ABA Joint Committee on Employee Benefits "Meeting with Agencies" Q&As. In the question, the participant had rolled a plan distribution over to a conduit IRA and was subsequently rehired and was going to repay the distribution:

"Funds in a conduit IRA can be used to buyback benefits, but it is not mandated that conduit IRA funds be used. An employee can use other funds, and therefore have basis on the buyback but such contribution would not have to be tested under 401(m) or 415. The employer may ask the employee if the funds are from an IRA in order to correctly treat the funds as basis or not."

[AndyH]

That makes sense. I was second guessing myself about the basis. Thanks for the input.