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February 16, 2009

Restorative payment

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Definition

Qualified Plans

A payment that is made to restore losses to a retirement plan, where the loss is as a result from actions by a fiduciary for which there is a reasonable risk of liability for breach of a fiduciary duty under Title I of the Employee Retirement Income Security Act of 1974 (ERISA), and plan participants who are similarly situated are treated similarly with respect to the payment.

IRAs

Payment that are made in order to restore all or some of the IRA losses resulting from a breach of fiduciary duty, fraud or federal or state securities violation, such as payments made pursuant to a court-approved settlement or independent third party arbitration or mediation award.

Restorative payments are not :

  • Subject to contribution limits
  • Treated as reportable deposits
  • Subject to the nondiscrimination rules of Code section 401(a)(4)
  • Subject to the special nondiscrimination tests of sections 401(k) or 401(m).
  • Subject to the deduction limits of section 404,219
  • Subject to the limitations on contributions and benefits under section 415(c) and (are not)
  • Subject to the excise tax on nondeductible contributions under section 4972.

Payments by the IRA owner made to IRAs to make up for losses due to market fluctuation or poor investment returns are generally treated as contributions and not as restorative payments

Referring Cite

Revenue Ruling 2002-45

Additional Helpful Information

  • The determination of whether a payment to a retirement plan or account is treated as a restorative payment, rather than as a contribution, is based on all of the relevant facts and circumstances.
  •  As a general rule, payments to a defined contribution plan are restorative payments for purposes of this revenue ruling only if the payments are made in order to restore some or all of the plan’s losses due to an action (or a failure to act) that creates a reasonable risk of liability for breach of fiduciary duty. In contrast, payments made to a plan to make up for losses due to market fluctuations and that are not attributable to a fiduciary breach are generally treated as contributions and not as restorative payments.
  •  Payments that result in different treatment for similarly situated plan participants are not restorative payments.
  • In no event are payments required under a plan or necessary to comply with a requirement of the Code considered restorative payments, even if the payments are delayed or otherwise made in circumstances under which there has been a breach of fiduciary duty.

Related Articles Tutorial or Other Content

  • PLR 200317048, repayments were treated as contributions.
  • PLR 200337017, repayments were not treated as contributions and therefore not reportable.
  • PLR 200705031,repayments were not treated as contributions and therefore not reportable. Note, it seems the use of the phrase ‘rolled over’ was misused here, as restorative payments should be nonreportable
  • PLR 200719017,repayments were not treated as contributions and therefore not reportable

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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