Participant died after cash distribution processed - no longer needed

A CPA came to us with this situation.

A woman suffered a stroke a year or so ago.  She needed cash to buy some type of long term care or medical policy. Not sure exactly what it was, but it doesn't matter for this question.

In late December 2022 she took a $450,000 cash distribution - $90,000 was W/H.

A couple of days later, but still in 2022, she unexpectedly died.

The money is no longer needed and the husband would rather it not be taxed.

Normally she would have 60 days to roll it over if she came up with the withholding.  Husband said he could afford the $90k, but the wife is deceased, so I don't think there is a way to do that.

If it was in the plan, he could roll it to a spousal IRA, but I don't think that can happen without having the distribution reversed first.

The check for the $360,000 has not been cashed.  Husband has it in his possession.

I doubt the plan can reverse it.

Can the plan limit the damage by voiding the $360k check and making the distribution $90k - 100% withheld?

Any other options, or are they stuck?

Practice Pointer:  In the future send distribution checks by direct wire transfer to the Participant's bank account.  Don't mail a check that can be lost, stolen, not cashed, not deposited and not negotiated. 

If a check has not been cashed or negotiated the intended transaction has not been completed.  It's still pending. 

In Maryland, Harry can sign a deed transferring real property to John,  but if the deed is not actually delivered to John, then no transfer of title has been accomplished and if Harry dies John will never get title since the intended transfer was not completed. 

Practice Pointer:   Do nothing.  A Plan Administrator should not be in the position of deciding what to do in a situation like this.  If he guesses wrong the Plan will be facing a claim for rather large damages as well as legal fees.  Better to let  court make the decision.  

Practice Pointer:  Contact the Plan's liability insurance carrier and seek their advice - in writing.  

The check was validly issued to the participant and presumably a 1099-R will be issued.

Refer the husband to an ERISA attorney. Let the attorney give him an opinion whether or not he can roll the proceeds to his IRA some how in the 60 day window even if it requires a private letter ruling.

On 1/13/2023 at 3:20 PM, fmsinc said:

 

If a check has not been cashed or negotiated the intended transaction has not been completed.  It's still pending. 

In Maryland, Harry can sign a deed transferring real property to John,  but if the deed is not actually delivered to John, then no transfer of title has been accomplished and if Harry dies John will never get title since the intended transfer was not completed. 

 

That might be true for state law in MD but for purposes of federal tax law I would take the position this distribution is done.  In tax law there is a concept known as "constructive receipt".   The wife had control of the check even if for a short period.   She had constructive receipt.   I am confident the IRS would say the late wife had a taxable distribution.   Most of the time once the check is mailed constructive receipt has happened.   That is why a check mailed on 12/30 but not received say until 1/3 the following year is on the 1099 for the year mailed.  

The only question would be is if the husband can roll it over to an inherited IRA or not and I can't cite anything one way or another. 

Thanks for your comments.  We didn't think there was a way around it - just wanted to see what others thought.

It's possible that even if there was a taxable distribution to the participant, the estate could be permitted to roll it over on behalf of the decedent. See the following case (kind of old but maybe still valid). https://cite.case.law/pdf/5871695/Gunther v. United States, 573 F. Supp. 126 (1982).pdf