I have a plan with no historical data except for the last few years. A participant is requesting a distribution but I do not have the basis for him. I am going to try to get the employer to try to find the basis for me. My guess is they are not going to have anything. What would be the process for paying this guy out without knowing the basis?

FWIW - If the employer/participant cannot provide you with any certified data to prove specific basis amounts, then I think you have to report as all taxable. (Or do a direct rollover) Granted this may ultimately be incorrect, but I don't see that there is any choice. At least that's how I'd do it...

Belgarath, my concern with rolling it to an IRA is that the IRA owner would now have an IRA for which no basis was reported ( or can be determined) and , resulting in the inability to determine the taxable/non-taxable portion of distributions, possibly resulting in the payment of taxes on amounts that should be tax-free…

Maybe the participant kept the statements from those missing years?

Appleby, if it ends up that the employer and the participant do not have anything, would you agree with Belgarath that the entire distribution of the after-tax monies be treated as taxable?

Don't forget the 1099-R:
Box 2b. Taxable Amount not Determined
Enter an “X” in this box only if you are unable to reasonably obtain the data needed to compute the taxable amount. If you check this box, leave box 2a blank unless you are reporting a traditional IRA, SEP IRA, or SIMPLE IRA distribution. Except for IRAs, make every effort to compute the taxable amount.

Harwood - good point. Appleby - I agree with you in principle - in fact, that exact thought occurred to me. But Harwood's point also opens up an additional can of worms.

1. For example, if you DON'T offer the participant the opportunity to do a direct rollover, you're in hot water. And if the participant chooses direct rollover, what other choice do you have but to allow it, absent specific data?

2. Can you report a direct rollover as Harwood noted? I don't think so - I would, as my best guess, say that this reporting option is only available for a direct distribution. But that's just a gut feeling - I have no supportable basis for that opinion.

3. If you offer a direct rollover, and the participant chooses a distribution instead, are you obligated to withhold 20%? Or do you withhold nothing, and report as Harwood suggested? I think in this situation I'd withhold nothing and use Harwood's aproach.

Any CPA's out there to jump in on this? It seems like this situation, while rare, might become somewhat more common in the future with the rising popularity of participant loans - some might default, then repay all or a portion. And once a plan has funneled through several recordkeepers, it would be easy enough to lose track of basis...