Is pension contribution to a terminated employee (ee), who was part of the co.'s old fund, taxable to the ee?

Question

I have client who was supposed to contribute to a pension plan, but one the employees argued with the pension lan and my client (the company), stopped making payments and later, the employee unfortunately got fired.

The terminated employee got the union involved and it was determined that my client owes $97K to the employee. My client wants to make this contribution to a new pension plan and I would like to know if this contribution made to this new pension plan on behalf of the terminated employee, will be taxable to the terminated employee? And what authority can I use to back up any conclusion(s)?

Answer 1

I can't tell from your information WHO determined you owe $97,000 or whether the money has ever been in a pension plan. It is also unclear to me if you are trying to put the money in YOUR company's plan, or the employee's new employer's plan. Any answers that make incorrect assumptions about either of those points is wrong, even if they are correct in the situation they address. This sounds to me like a situation that requires a complete review by an attorney.

Answer 2

As long as the distribution is done via a direct rollover between the two pension plans there will be no tax consequences.

If it passes through the employees hands, he'll have to make up the 20% withholding from his own pocket to fully fund the rollover plan. If would also need to be completed with 60 days of the payout to the employee.

This assumes that the negotiated or arbitrated settlement was actually deposited to the employee's pension account, so that it can be rolled over properly. If it was paid to him as a settlement it's fully taxable as ordinary income (but no 10% penalty) and CANNOT be rolled over into another qualified retirement plan.

Answer 3

Who determined that you owe him $97,000? The union or a judge. Might be worthwhile to ask a lawyer first (unless you are a lawyer, lol). If you have to make the payment, I'd suggest funding it into the clients pension fund and let the employee roll it over into his new plan. There may be matching funds if the employee funds it directly into the new plan which would not be fair since people who handled there retirement account correctly would only get the tax free benefit of a rollover. Your client should only be responsible for putting the money into their own pension plan. If the employee wants to remove it directly, then it would be a taxable withdrawal. Just my opinion. No direct experience. Good luck.