What to do with 403(b)payments after employee terminates and receives

[Guest Joy M]

We have a non-erisa 403b plan, when I took over this job I found out that some payments were not made for year 2000 for 4 employees. I sent a check in to put this money back into the account. The employees terminated and the employees have already withdrawn their money and the administrator sent me back the check. My question is as the employer do I send this money to the former employee or keep it for the company? The money has not been withheld from the paychecks because it is employer deferred. Also, if anyone knows how to tax this money if the employee receives it or do I need to worry about taxes at all?

[Michael Devault]

In my opinion, you should not keep the money for the employer. In the event the IRS decides to audit your plan, you would want to be able to show that all contributions have been made properly.

I also beleive thet the money should be contributed to a proper 403(B) funding vehicle. If the employees subsequently decide to withdraw the funds, the vendor will be responsible for sending Form 1099-R, properly coded to reflect the nature of the withdrawal.

I suggest that you contact the affected employees individually to determine how to handle each situation. If they rolled their original distributions into an IRA, perhaps the IRA custodian will accept the 403(B) contribution and immediately roll it into the IRA. If the employee rolled the distribution into another 403(B) vehicle, it can likely accept the additional contribution.

Good luck!