Segregated Funds Question!

[Peachie]

Could someone help me understand the tax consequence of a received segregated funds check? Here are the facts:

Former company allowed us to segregate certain dollar amounts from an ESOT plan at age 55 and 10 years of service. They used a formula to determine how much could be segregated each year after the stock of the company was evaluated. The funds were then put into an account with Fidelity. We had no access to the funds. We only recently learned that Fidelity sent statements each month to the company for each participant. We were given access to the statements for the first time about a year or so ago. The accounts did earn or lose money—depending on the fund we chose and the behavior of the market. The company went out of business 6/30.

I received a check from this fund recently with a letter stating a 1099 would follow next year. I think the person handling this will send each of us a 1099R, though I am not sure that's the form we should receive. She says Fidelity won't be sending us any 1099. She will, on behalf of the company.

I need clarity on what kind of tax situation I may face before I cash the check. Is this a (a) pension document, (b) a schedule D instrument, or a (c) mutual fund instrument? Doesn't seem like it is money I should rollover because it's not part of a 401(k) plan.

The woman at the old company will do what she thinks is best, not necessarily the correct thing. I want to know the right thing to do before I cash the check.

I have tried researching this but only come away a little more confused as it shows up as either an annuity or a mutual fund acting investment.

My e-mail address is [email]peachie1000@hotmail.com for anyone not wishing to respond in this forum, though this question might help someone else.

Thanks.

Peachie

[ED SMITH]

Why would you not want to cash the check? If you have doubts about its validity or its taxability, put it into a CD or other interest bearing account. If it is taxable, and I am sure that some of it will be, you will have the funds available to pay any additional tax generated by the check money.

The 1099 you receive should clarify the issue.

[erchess]

My impression

I thought that the action other than cashing it that she was contemplating was rolling it over into an IRA or other Qualified Plan but that she had decided that was probably in appropriate because she doesn't think the money is coming from a Qualified Plan.

She clearly doesn't trust the tax knowledge of the people who are sending her the check and sending her the 1099 and I assume she thinks that following the 1099 would lead to a worse for her than appropriate tax consequence.

I have never done this or even seen it done but there used to be a form you were supposed to fill out explaining yourself if you wanted to treat income differently from the way the document it was reported on would have indicated.

[Peachie]

I thought that the action other than cashing it that she was contemplating was rolling it over into an IRA or other Qualified Plan but that she had decided that was probably in appropriate because she doesn't think the money is coming from a Qualified Plan.

She clearly doesn't trust the tax knowledge of the people who are sending her the check and sending her the 1099 and I assume she thinks that following the 1099 would lead to a worse for her than appropriate tax consequence.

I have never done this or even seen it done but there used to be a form you were supposed to fill out explaining yourself if you wanted to treat income differently from the way the document it was reported on would have indicated.

Erchess,

Your comments are right on target. I do not trust the tax knowledge of the person that will issue the 1099. If it's to be a taxable event, I want to be sure of the tax treatment. This money comes out of a defunct ESOT plan available to me only because I qualified based on age and years of service. There are only 12 people getting the check.

Ed, I have no problem cashing or depositing the check. My concern is if it's treated as a distribution from a retirement vehicle, I can just roll it over into my IRA and not be concerned about the 1099. However, if it's going to receive some other treatment, then I can proceed accordingly. The woman issuing the 1099 has sought my guidance on other tax matters which is why I don't trust what she might send.

I appreciate both of your comments, but Erchess, you were able to voice what my exact concerns are.

Peachie

[Edsel]

Distribution Codes

Looks like the concern here is receiving a 1099 with a wrong distribution code because the party issuing the 1099 doesn't know everything she needs to know.

Assuming the ESOT qualifies as being eligible for a rollover, I believe you can do this, and respond to the 1099 on your tax return accordingly. A distribution code of "G" would be ideal for a rollover, but the issuer may not be aware of this, or better still, may not ever know what you did with the money.

To make matters worse, the issuer is required to withhold 20% from the distribution unless there is a valid reason to forego doing so.

[DaveO]

Question is, Is the ESOT a qualified plan.

An ESOT is some variation of an ESOP. Rev. Proc. 2003–23 discusses how the rollover of Sub "S" stock from an ESOP to an IRA wouldn't terminate the "S" election. What would the downside be of depositing the funds in an IRA?

[erchess]

Dear Peachie

Thank you for your kind words. I was only too glad to be able to help. This board has many wonderful people on it.

[Peachie]

Edsel said: To make matters worse, the issuer is required to withhold 20% from the distribution unless there is a valid reason to forego doing so.

The withholding is no issue because I am beyond 591/2 and the amount is not a lot.

An ESOT is some variation of an ESOP. Rev. Proc. 2003–23 discusses how the rollover of Sub "S" stock from an ESOP to an IRA wouldn't terminate the "S" election. What would the downside be of depositing the funds in an IRA?

There is no downside to depositing into an IRA other than if it's already a retirement vehicle, I would roll it over. However, if it's not, I would deposit it into an IRA and receive a favorable tax treatment because I can still write off traditional IRA deposits due to my tax status on my 1040. I don't think IRS would look at this as a favorable transaction if I turn a rollover into a tax deduction. Make sense? I will look into the proc 2003-23 that you mention to see if clarity is imminent.

You are welcome Erchess. It was nice to see that I made sense. You are right, there are some really great people on this board-several of which have tried to help me.

Thanks so much.

Peachie

[Peachie]

An ESOT is some variation of an ESOP. Rev. Proc. 2003–23 discusses how the rollover of Sub "S" stock from an ESOP to an IRA wouldn't terminate the "S" election. What would the downside be of depositing the funds in an IRA?

I got info from the rev. procedure you suggested above. I also found a Q&A that really gave me a good understanding of what steps I could take. I will just roll it over into an IRA and expect to receive a 1099R from the HR department at my old job.

It was really fun and enlightening to find this info. Thank you so very much for your input.

Peachie