Expert: Allen - 9/2/2009

Question
My company restructured and separated my division to a wholly-owned subsidiary (LLC) of the company. In this transition, I received paperwork indicating that due to pension benefit being under $10k, I could either roll it out or take a distribution. I rolled it out to an IRA account. My company has since come back and stated that the distribution was technically not allowed because eventhough we are a separate company, we are still affiliated with the parent company.  Citing "complex IRS code" they indicate that they are required to ask for the distribution to be returned, with interest. Also, in the explanation of this mistake, they began to call the distribution an "overpayment". They also outlined the multiple penalties and excise taxes that would be leveraged by the IRS if I refused to return the "overpayment".
I feel like I'm being penalized because of their mistake. Is this right? Is there somewhere that I can reference specific IRS codes on this situation?

Answer
This is definitely a very complex area. Whether you could receive a distribution or not depends on exactly how the restructuring was completed.

If the deal was completed in a manner that would not have allowed for the distribution, then they are correct in stating that you have to pay the money back. Furthermore, the company could write the institution that holds your IRA and tell them it was not established legitimately.

However, if the IRA account lost money, then they are on shaky grounds asking you to pay interest due to their mistake.

I see three alternatives:
1. Try to reason with the company about the payment of interest. Do this in writing.
2. If the company will not compromise, you can contact an attorney who is knowledgeable about pensions. However, I would only do this if the amount involved is substantial since legal fees will be high.
3. Contact the local office of the U.S. Dept. of Labor - Employee Benefit Security Administration. They may be able to help you.

Good luck