I have a terminated participant who received their distribution (rollover) of their entire account balance. The account is closed.

The employer now wants to make their employer contribution to which this terminated participant is entitled to. I told them that they will have to make the contribution (reopen the account) for the termed participant and then request a second distribution.

The employer asked if he could just cut a check to the rollover company instead of reopening and depositing it into their account, whereby the participant will incur another distribution fee from the investment company.

What are your thoughts on this?

I feel that for IRS purposes (paper trail) that the deposit should be made into the plan, and then distributed, but the employer would really like to avoid additional fees for the participant. Is there any clear direction (cites) on this that anyone knows of?

Thanks so much!

Isn't there a general plan account into which the contribution could be deposited and from which it could be distributed?

What if the employer contribution amount is made out to "The Trustees of the ABC Profit Sharing Plan" - and then the Trustees can endorse the check over to the recipient IRA. Arguably a check made out to the Trustees becomes a plan asset, so a Trustee endorsement over to the reciepient IRA is a distribution from the plan.

Only thing I can think of...

The fee probably covers things like notices, 1099's etc. Who does that if you work outside the process?

How long ago was the first distribution?

My former company would require a new distribution request if the first one is over 90 days old or it crosses tax years.

I think neither you nor the Employer can say for certain where the participant wants his or her money. The person may be in a different financial situation than when the distribution was first done. Maybe the IRA was moved to another vendor. Maybe a car payment or tuition bill is due and this money would be very timely. There are many circumstances where the (former) participant would like the money to go to a place other than the original IRA.

In any case, it's probably up to the firm where the assets are. It probably has its own procedures for handling these cases. Maybe ask for processing fees to be waived in this case.

I think a short cut will just lead to trouble (e.g. no 1099R done). Just be glad you did not overpay the person as opposed to underpaying. Sorry I can't be more constructive, but doing it right with payouts is always the best way to go IMHO.

Definitely do a f1099-R for the tailings.

Also, it is good for paper trail purposes if it actually is deposited into the plan. Also will make it easier to remember to include it as a contributed amount and a distributed amount when doing the f5500 for the year.

As to new 402f and other notices, those are required during the 180 days before the annuity starting date, i.e. the first distribution. They would not be required again.

As for giving a new election opportunity just for the tailings, I do not think you need to do so--unless you have for HCEs in that past (or might in the future).

Building on other comments, the payment does need to come from the Plan; not the Employer. A number of years ago I had to research a situation where the employer paid the person directly, in lieu of depositing money to the trust and then having the trust pay the money. It was concluded that the benefit was still due from the plan, and the monies paid by the Employer were simply a nice bonus to the person they fired for poor performance! Shortcuts are bad. Very, very bad.