Pension Plan Discontinue Force Distribution

Submitted by Julie Brangenberg on Thu, 2014-07-10 14:55

Hello. I have a customer who works construction, and the company recently discontinued their profit sharing plan. The customer said they were sent a letter and the only option given was a lump sum payout (which I’m not sure is correct). They didn’t know the amount at the time, so gave the company their bank information for payment. They received $40,000 in their bank account at the beginning of July 2014. The company withheld 20% for taxes. The company paid 85% of the total, because they haven’t finalized their books for last quarter. They estimate receiving the remaining balance at the end of July. I have several questions:

1. If I contact the company, is there a chance their lump sum payment can be reversed into a rollover?

If not,

2. Should he wait until the final payment is received when he does a 60 day rollover?

3. What can they do about the tax withholding?
a. Can they make it up, and rollover the entire amount?
b. If they can’t will they have to claim the amount withheld for taxes, and will they also get money back, since 80% of the total will be rolled over?
c. Is he still subject to the 10% penalty for early withdrawal?

4. Can they roll the money into a Roth IRA since he already paid the taxes?



Submitted by Alan - IRA critic on Thu, 2014-07-10 16:45

  1. You could try, but reversal is highly unlikely. And the withholding complicates things.
  2. He could wait for awhile, but should be sure to meet the 60 day deadline. Doing more than one rollover is OK too.
  3. The withholding is subject to tax and penalty unless he replaces the withheld amount from other dollars he has access to. That is the only way to accomplish a complete rollover. The withholding has probably been submitted to the IRS and credited to his tax account, so if he intends to make up the withholding, he can reduce other withholding or estimates to effectively recoup the withholding before filing his 2014 return.
  4. He can roll all or a portion of the funds to a Roth IRA if he wants, and he can change his mind and recharacterize a Roth rollover to a TIRA if the rollover loses money or the taxes are too high. Note that the 20% withheld is just a deposit against his eventual tax bill, and it could be too high or too low depending on his other taxable income and deductions.

Submitted by Julie Brangenberg on Thu, 2014-07-10 19:05

Pertaining to: #2, I am under the impression that only one 60 day rollover per calendar year/account is permitted.  How can he do more than one for this situation.#4  could he just write a check and put it in a Roth IRA as a 60 day rollover?

Submitted by Alan - IRA critic on Thu, 2014-07-10 22:02

The one rollover requirement per IRA account (next year for all IRAs) does not apply when an employer plan is on either end of the transaction. It only applies to IRA to IRA rollovers. In addition, it does not apply to rollovers to a Roth IRA.  Yes, he could write a check to his Roth IRA if he wanted, just as he could to a rollover TIRA. Or he could split the rollovers, using one check for the TIRA portion and another for the Roth. But the withholding needs to be replaced if the rollovers are to be complete.

Submitted by Martin Helmer on Thu, 2014-07-10 22:10

#2.  Rollovers from qualified 401 plans aren’t limited to one per year, in contrast to rollovers from IRAs.#4.  Yes, he could write a check to a Roth.#1.   I agree reversal is unlikely, unless the plan screwed up, as you hinted.  It’s fine for a PSP to offer only a lump sum option, if that’s the only option your customer was ever eligible for under this plan.  But even with a lump sum, the plan must offer the rollover option.  Presumably the plan did that and your customer signed off on personal receipt of the funds.

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