Can a qualified settlement fund distribution (Reg Section 1.468B-1thru 5) be deposited into 401k rollover to avoid taxes?

[klschillinger]

Received a payment from participating in a employee plan which was a distribution from a litigation net settlement fund. I am 54 years old. I would prefer to deposit funds into a  rollover account and not claim as  income.  

[Anonymous_]

@dmertz 

[dmertz · Accepted solution]

Rev. Rul. 2002-45 addresses restorative payments to defined contribution plans and describes a fact-and-circumstances test for determining if the payment is a restorative payment.  In various Private Letter Rulings the IRS has also applied Rev. Rul. 2002-45 to IRAs.  What's not clear is if the restorative payment can be made to an account different from the one in which the breach of fiduciary responsibility occurred.  It seems pretty clear that the restorative payment could be made to the original employer plan in which the breach of fiduciary responsibility occurred and then, if permissible, rolled over to another account, but I have been unable to find anything from the IRS suggesting that the restorative payment could be made directly to a different account such as a rollover IRA.  Allowing the restorative payment to be deposited into a different account could, in some cases, result in bypassing restrictions on distributions from the original plan, so might not be permitted.

Can the restorative payment be made to the original account where the breach of fiduciary responsibility occurred?  If so, the funds could then be rolled over, if permitted.

[klschillinger]

The restorative account was rolled-over already, as I had left the employer.  Since original account  was already rolled over, I was hoping to deposit it into that account.

[dmertz]

Do you know if the distribution to you from the settlement fund will be reported on Form 1099-R?  If the new account is an IRA and the distribution from the settlement fund is reported on Form 1099-R as a distribution (likely code 1), you would probably need to deposit it as a rollover so that the IRA reports it on Form 5498 as a rollover.

[klschillinger]

Unfortunately, I don't know.  I will see if I can find this answer.  If not deposited,  I am also concerned I might have to pay a penalty as I have not reached "retirement age".