Restoration of Losses for Delayed Distributions (Posted November 8, 2003) Technical Tip 108: The following question and answer were from the IRS Q&A Session at the 2002 ASPPA Annual Conference: Employer "forgot" to distribute term distribution forms in 2001 based on 12/31/00 balance. In 2002, employer distributes election forms based on 12/31/01 balance--has a 25% loss. Can the employer "restore" the 25% loss for the terminees who elect distribution in 2002? Is it deductible? What about non-terminees who would otherwise suffer loss if employer does not make up? Response: In most plans, there is no mandatory payout and if the employee did not request distribution, there would not appear to be a liability. If the plan provided, for example, a mandatory cash out if under $5,000, there could conceivably be an issue. We suggest you review Revenue Ruling 2002-45. Comment by our ERISA attorneys: Revenue Ruling ("Rev. Rul.") 2002-45 is the IRS's most recent guidance on "restorative payments" to defined contribution plans. In Rev. Rul. 2002-45 the IRS ruled that payments made to qualified defined contribution plans will not be treated as contributions to the plan for purposes of Internal Revenue Code ("Code") sections 401(a)(4), 401(k)(3), 401(m), 404, 415 and 4972 if (i) they are made to restore losses to the plan resulting from actions by a fiduciary for which there is reasonable risk of liability for breach of a fiduciary duty under Title I of ERISA, and (ii) similarly situated plan participants are treated similarly. The determination of whether such a payment is properly treated as a restorative payment is based on the relevant facts and circumstances. However, this does not include payments required under a plan or necessary to comply with a requirement of the Code. Thus, it is possible that the payment to "restore" the 25% loss in the question above could be characterized as a restorative payment. If so, while the payment may not be deducted under Code section 404, it is possible it could be deducted under section 162, as an ordinary and necessary business expense. View all Tips © 2012 Reish Luftman Reicher & Cohen, a Professional Corporation Important notice: Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner's situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation.