401k distr to participant who died before endorsing check
Here’s one I’ve never seen before: My client’s father received a letter from his previous employer’s 401k plan stating that he was going to be turning 70 1/2 and that, if he did not take action they would send a full distribution check for the balance in his 401k plan. Unfortunately the father was in the final stages of lung cancer at the time and took no action. Approximately 90 days before his 70 1/2 birthday, the employer sent a check payable to the father for the full balance of his 401k, minus the withholding amount. [u]The father died shortly thereafter, BEFORE he endorsed or cashed the check[/u]. My client, who was a beneficiary on the 401k plan, asked the employer to cancel the check and return the money to the 401k plan and then send the balance to the 4o1k plan beneficiaries. The employer refused, saying that they had distributed the money (without instruction to do so) while the plan participant (the father) was still living and therefore cannot take the check back. The check cannot be deposited into an IRA Rollover account in the name of the father because he never endorsed the check before his death. The father already had three IRA Rollover accounts in existence before his death, but none of them will accept the check for deposit into one of those accounts because the owner is now deceased. [u]There are only two weeks left on the 60 day rollover window, at this point, based on the effective date of the check[/u].
Is there any way to put the money into any qualified plan accounts (either the original 401k or an existing IRA Rollover account or a new IRA Rollover account), so that the beneficiaries can stretch the dollars, rather than making the check part of the estate and paying income and estate taxes on the full amount of the distribution? Did the father (the plan participant) actually take possession of the check, even though he did not endorse it or deposit it? Is there any legitimate argument that can be made requiring the employer to take the money back into the 401k plan and then distributing it directly to the beneficiaries, since they acted without instructions to distribute before the plan participant turned 70 1/2?
Permalink Submitted by Bruce Steiner on Wed, 2012-07-18 20:46
For a rollover by an executor, see PLR 200502050, Revenue Procedure 2003-16, Gunther v. United States, 573 F. Supp. 126 (W.D. Mich. 1982).
Bruce Steiner
Permalink Submitted by Alan Spross on Wed, 2012-07-18 21:01
Have you seen the letter the plan sent? I don’t see how an RMD obligation translates into a lump sum distribution requirement.
What was the plan balance?
Was plan administrator aware of his condition when the letter was sent? Large professional administrator?
Permalink Submitted by Scott Graham on Wed, 2012-07-18 21:16
The plan sponsor (employer) is an S&P 100 company, so I presume they either self-administer or use another large TPA. My client has not seen the original notification letter, but has requested a copy of it from the administrator. We do not believe the plan administrator was aware of the participant’s condition when they sent either the letter or the distribution check. I question whether they have a legal standing to unilaterally send a distribution from the plan, without any authorization to do so from the participant; particularly BEFORE the participant reached age 70 1/2. The plan participant died at age 70 years, 4 months; and the distribution was made at age 70 years, 3 months.
Permalink Submitted by Scott Graham on Wed, 2012-07-18 21:18
The plan balance was approximately $150,000; and that full amount was distributed by check.
Permalink Submitted by Alan Spross on Wed, 2012-07-18 23:23
The PLR has some different circumstances than this case. One conclusion of the PLR was that the IRS approved rollover after 60 days would be to an IRA without a designated beneficiary unless the decedent had clearly set up an IRA to receive the rollover with designated beneficiaries. It might well be that the IRS approves the rollover, but with an estate beneficiary the IRA would fall under the 5 year rule since the decedent passed prior to the required beginning date.
The plan will probably resist all the more in recouping the funds when they find out that they are now dealing with an executor and will have individual beneficiaries to deal with if they accept the funds. Therefore, they are not likely to accept the funds unless they clearly violated the plan provisions, so you would need a complete copy of the plan. An SPD would not contain the detail needed.
Therefore, the number of beneficiaries that want to stretch their shares over their life expectancy might be an indication whether they wish to spend the time and money to pressure the plan to accept the funds back and be able to show a violation of the plan provisions. Add to that the 20% withholding that now sits with the IRS (withholding should not have been applied to the small portion that was the RMD).
This sounds like odd behavior and/or provisions for a very large company plan.
Permalink Submitted by Denise Appleby on Thu, 2012-07-19 10:54
In most cases, the employer/plan administrator has limited options when distributing plan assets. They must follow the terms of the plan document or risk qualification. From my experience, large plans are usually handled by knowledgeable and qualified administrators that only take action allowed under the regulations and required by the terms of the plan document. It may seem like they processed the distribution without instructions from the participant- but the terms of the plan document, and documentation already on file may have authorized the distribution. Reviewing a copy of the plan document/SPD/distribution policies would provide the information needed.