topic I received a check for a "restorative payment" from a class action for improper actions taken with respect to my 401k. How do I deposit the check and document this? in Retirement tax questions

I received a check for a "restorative payment" from a class action for improper actions taken with respect to my 401k. How do I deposit the check and document this?

skostbyerly — Mon, 17 Aug 2020 17:27:02 GMT

I want the funds to go into a retirement account (401k or IRA) and not be taxable t o me at this time.

Re: I received a check for a "restorative payment" from a class action for improper actions taken with respect to my 401k. How do I deposit the check and document this?

Opus 17 — Mon, 17 Aug 2020 17:49:06 GMT

You can't deposit money into a 401(k) ever, it can only come from payroll withdrawals. Are you eligible to make regular IRA or Roth IRA contributions?

Can you give more details about the lawsuit and the payment? It seems to me that they payer should have put the money back into your 401(k) for you, if that was the issue. I rather expect this is going to be a taxable lawsuit settlement and there isn't any way to defer the taxes until later, but I could be wrong. @dmertz

Re: I received a check for a "restorative payment" from a class action for improper actions taken with respect to my 401k. How do I deposit the check and document this?

macuser_22 — Mon, 17 Aug 2020 18:04:18 GMT

Was the check payable to you personally or payable to your 401(k) plan.

A "restorative payment" to a retirement plan is not a contribution. Ask the plan administrator.

Revenue Ruling 2002-45

Re: I received a check for a "restorative payment" from a class action for improper actions taken with respect to my 401k. How do I deposit the check and document this?

Opus 17 — Mon, 17 Aug 2020 18:43:33 GMT

@macuser_22 wrote:

Was the check payable to you personally or payable to your 401(k) plan.

A "restorative payment" to a retirement plan is not a contribution. Ask the plan administrator.

Revenue Ruling 2002-45

As best I understand it, "not a contribution" means that the employer (in the case of that particular ruling) can deposit money tax-deferred into the 401(k) and because it is not treated as a "contribution", it does not affect the employees' annual contributions maximums or implicate other rules about contributions.

The restorative payment could have been sent directly to the plan tax-deferred. The question here is what does the employee do with a check in hand? The plan trustee might accept it as money deposited into the plan (in which case this is "exception that proves the rule" that you normally can't just send a check to a 401(k).)

I guess you need to ask the trustee if they will accept a deposit (not a "contribution") of a restorative payment.

I think there is probably no way of putting in a separate IRA as a restorative payment unless you are already eligible to contribute to an IRA. To be a restorative payment, it has to go into the account being restored. If the trustee will accept it.

Re: I received a check for a "restorative payment" from a class action for improper actions taken with respect to my 401k. How do I deposit the check and document this?

macuser_22 — Mon, 17 Aug 2020 19:16:47 GMT

I have received several checks (from securities held in my IRA) sent to me in the name of my IRA for my benefit for similar reasons, so I just endorse the check and send it to the IRA custodian that just adds to the IRA as a miscellaneous transaction. If I cashed the check then that would be a reportable IRA distribution that is difficult to report without a 1099-R that will never occur.

My IRA plan trustee has never has an issue with this so I assume that a 401(k) plan trustee should know how to handle it.