Friday, April 11, 2014

Tax Q&A: Settlement from a 401(k) lawsuit

As the April 15 tax deadline fast approaches, you probably have questions. Fortunately, we have answers. Every day until April 15, members of the American Institute of Certified Public Accountants have agreed to answer selected tax questions from USA TODAY readers. Submit your questions to

Q: I received a check from a settlement lawsuit against a stock that I still own on my 401(k). Can I deposit that check in my 401(k)? What would happen if I keep it and cash it?

A: The answer to this question depends on a few missing facts.

The settlement check belongs to the 401(k) plan's trust, assuming it is to make you whole for lost earnings or profits on your investment in the plan. The check should have been made out to your 401(k) plan, not to you personally. If the check is made out to you personally, with your Social Security number, you should determine how to get the check reissued in the name of the plan. The check should have been issued to the account holder on record as of the date(s) of the loss. If the name of the account is not accurate, you should be sure to get the name corrected, not just for this transaction, but for future tracking of the tax-deferred status of the plan's account value.

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If you keep the check, it should be considered a premature distribution, unless you otherwise qualify for the distribution. If it is considered to be from your salary deferral account, the distribution without a qualifying distributable event could disqualify the plan. Refer to your plan's Summary Plan Description for more details on distributable events your plan allows for.

The payer will send you a 1099 for the check — and should do that whether you cash it or not — so you will want to be sure the payer has his facts correct: proper name, tax identifying number a! nd address for the 401(k) plan.

Lisa Germano, J.D., CPA, CGMA, President and General Counsel, Actuarial Benefits & Design Company, Midlothian, Va.

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