An owner (>5%) who is over age 70.5 had been taking RMD’s from his 401(k) Plan. During 2006 the owner took his RMD, the plan terminated, he rolled over his remaining balance to an IRA and everybody else took their money out of the plan. Everybody showed a $0 balance in the plan as of 12/31/06.
Lo and behold, during 2007 the plan received some litigation proceeds from one of the plan investments and the broker transferred the >5% owner’s share of the proceeds to his IRA. The question is whether this participant should have had a portion of that rollover distributed as an RMD for 2007? If so, how would you calculate it since he did not have a balance in the plan as of 12/31/06?

Anybody ever run across this situation before? Since 401(a)(9) is a qualification requirement I am concerned about jeopardizing all of the plan distributions.

There is no RMD for 2007 under the plan. Keep in mind that the IRA now has the assets and he will take a 2007 RMD from that source, so it's not like he's getting away with anything. The litigation proceeds are treated simply as investment gains that will be picked up for RMD purposes in 2008.