Rollover Check Refunded

A former participant had his account balance distributed in February 2017.  The distribution was processed as a direct rollover to his new company's 401k. The check was deposited in February by the rollover institution, Empower. The plan administrator never gave the authorization to Empower so Empower issued a check payable to our Trust, FBO the former participant, as a refund. The check was issued and mailed to the former participant in April 2017. 

The former participant sent us the refund check this week. He has held on to the check for almost a year.

Do we need to accept the funds back? The form 1099R was already issued. Also, we couldn't accept the check as we have since changed Custodians and the check is made payable to our old bank.

What options does the former participant have? 

Thank you

One part of your facts are unclear and it might make a difference in my mind.

When you say "the plan administrator never gave the authorization to Empower..."

Is this the PA at the new plan that was going to receive the rollover authorization (seems like the most likely answer) or the PA from the sending plan? 

To me at least it sounds like a PA failed to so their job and that caused the problem and it seems like that PA ought to be responsible.  I would think sending needed paperwork is a fiduciary responsibility. 

Maybe the answer won't change anything.  I am doubtful the old plan has any duty to the person.  They did what they needed to do unless it was their PA that failed to send the paperwork. 

I think you just have to take a practical approach to this.

1. The check is no good so Empower effectively has the money.
2. Get them to reissue a check, probably to your new bank (with some difficulty).
3. Start all over.  It's up to you and your system whether you can amend the 1099 as if it never happened (technically correct and probably not all that difficult) or leave that be and treat it as if it's "just" a correction and not issue a new 1099 for 2018.
4. Make sure whatever moron dropped the ball doesn't screw this up again.

21 minutes ago, Bird said:

... whatever moron ...

Plural?

I'll play devil's advocate. New plan accepted the funds and deposited them to the trust. After the check cleared what authority did the new plan have to make a distribution after the fact?

I'm not sure why this is now becoming the old plan's problem when they processed a rollover per the participants instructions and the new plan cashed the check. At that point as old Plan I'm thinking I'm done. I'd take their cashing the check as their acceptance of the rollover.

13 hours ago, Lou S. said:

I'll play devil's advocate. New plan accepted the funds and deposited them to the trust. After the check cleared what authority did the new plan have to make a distribution after the fact?

I'm not sure why this is now becoming the old plan's problem when they processed a rollover per the participants instructions and the new plan cashed the check. At that point as old Plan I'm thinking I'm done. I'd take their cashing the check as their acceptance of the rollover.

 

What I will tell you is this is more common then you might think.  This happens to me for one of my clients maybe 1 or 2 times a year.  A check gets sent to one of the big mutual fund houses for a rollover.  Their practice is to cash all checks as they come in as part of their security.  They don't want a check lost of stolen.  They then worry if they know what to do with the money.  If they don't know what they are supposed to do they simply write a check back to where the money came from.  Every now and then the only reason I find out about it is I am reconciling the cash in the client's account and there is too much cash. 

It sounds like it is the new plan's problem as it sounds like  the new plan failed to send the paperwork they should have to Empower. 

5 hours ago, ESOP Guy said:

What I will tell you is this is more common then you might think.  This happens to me for one of my clients maybe 1 or 2 times a year.  A check gets sent to one of the big mutual fund houses for a rollover.  Their practice is to cash all checks as they come in as part of their security. 

A new practice seems to be to send direct wires to the new custodian, which is very frustrating.  We get a wire that shows up in the plan with very little identifying information.  This can sometimes take us hours of work to track down the participant and the source of the money (plan, IRA, etc.)  If the check gets mailed to the recordkeeper (as per the instructions listed on our incoming rollover instructions), we can do all of the legwork prior to the check ever hitting the plan.  We have had to send back things like cashiers checks drawn on participant bank accounts (that are just "extra" deposits to the plan) and checks received for people that are not eligible for the plan and the plan does not permit rollovers prior to eligibility, etc.

@ESOP & @PAM

good points both of you.

I guess the bigger question is why did the participant hold this uncashed check for 9+ months. Obviously this would have been an easy fix if it hadn't crossed tax years with 1099-R reporting already done.

4 minutes ago, Lou S. said:

@ESOP & @PAM

good points both of you.

I guess the bigger question is why did the participant hold this uncashed check for 9+ months. Obviously this would have been an easy fix if it hadn't crossed tax years with 1099-R reporting already done.

 

That I agree 100% with.  I will not defend that ever!