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1099-R - when participant elects rollover, but doesn't rollover


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We had a call from a terminated participant that elected to take his distribution from a 401k plan in the form of a rollover to an IRA. The check was made payable to his IRA institution fbo participant name and was sent to the institution (per his instructions on the distribution paperwork). This occurred in 2013. The call from the participant came in a couple of days ago and he tells us that the money was not put into the IRA account, but rather into his checking account. We have already prepared the 1099-R with a code G and submitted the info to the IRS (figures he would call the day after we submitted our filing to the IRS). Do we complete a corrected 1099-R to indicate a lump sum cash distribution with no withholding? Does this create an issue for us as the submitter of the withholdings? What is our exposure? Any replies are welcome!

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Certain facts are not clear. Was his designated IRA custodian the same institution at which he has his checking account and it was deposited to the wrong account by mistake? If so, he needs to fight this out with that financial institution. If the IRA custodian is a different entity, then it sounds like he "changed his mind" about a rollover and was able to convince a teller at his bank to deposit it to his checking account. Maybe he had this scam in mind all along and he was able to escape not only the 20% tax w/h but also as far as the IRS thinks he shouldn't be taxed on the distribution, although if it was a scam I don't understand why he would contact you. However, in either case I don't see where the payor has any responsibility to correct the 1099-R because it never should have been deposited anywhere but the IRA to which the check was made payable.

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I agree with jpod. Sounds like the payor did everything correctly and should not amend the 1099-R. It's the participant's issue (and possibly the bank for depositing a check improperly).

I carry stuff uphill for others who get all the glory.

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I did finally find it in the ERISA Outline book 7.294 of the 2012 edition

withholding party (plan administrator or payor) is liable for the collection of the withholding tax.

if not withheld, the IRS may recover the withholding tax (and any possible penalties) from the withholding party. this is known as the "trust find recover" under IRC 6672

The penalty is usually abated if the tax is paid by the participant, which of course is what would normally happen.

then there is a blurb if you relied on reasonable info for a rollover the administrator is off the hook...

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From page 0-8 of the 1099-R instructions:

Corrected Form 1099-R

If you filed a Form 1099-R with the IRS and later discover that there is an error on it, you must correct it as soon as possible. For example, if you transmit a direct rollover and file a Form 1099-R with the IRS reporting that none of the direct rollover is taxable by entering 0 (zero) in box 2a, and you then discover that part of the direct rollover consists of RMDs under section 401(a)(9), you must file a corrected Form 1099-R reporting the eligible rollover distribution as the direct rollover and file a new Form 1099-R reporting the RMD as if it had been distributed to the participant. See part H in the 2013 General Instructions for Certain Information Returns or Pub. 1220, if filing electronically.

From the OP, it sounds to me that you have been notified that the distribution was not rolled over to an IRA. If the financial institution can't/won't fix it, then I think you will need to amend the Form 1099-R. Otherwise, you will be incorrectly reporting a taxable distribution as non-taxable.

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Thank you Kevin. That was our initial thought as well - correcting the 1099-R. We were concerned what sort of ramifications it might have on us as the filer of the withholdings - of which there were none.

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Are you allowed, as a payor, to charge for a corrected 1099 if the error was not your fault?

I guess I'm just cranky this morning, but I'm so sick of having to waste my time for the screw-ups by other people that I could scream!

Possibly it's just the 16 below zero temperature in March that seems a bit excessive. People are starting to get very short-tempered...

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I'm not so sure Kevin's quote from the instructions will mandate that the employer do anything. "...and later discover that there is an error on it..." Where is the error on the form?

As I read the OP, the employer/plan completed the 1099 correctly. What the participant did afterward is not relevant to the 1099. Yes, it's relevant to the individual's tax status, but not to the 1099.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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The 1099-R in question shows a direct rollover to an eligible retirement plan. Now they have been notified that the funds were deposited into his checking account and not into the IRA. Since it was not paid directly to an eligible retirement plan, how is it a direct rollover?

1.401(a)(31)-1

Q-3: What is a direct rollover that satisfies section 401(a)(31), and how is it accomplished?

A-3: A direct rollover that satisfies section 401(a)(31) is an eligible rollover distribution that is paid directly to an eligible retirement plan for the benefit of the distributee. A direct rollover may be accomplished by any reasonable means of direct payment to an eligible retirement plan. Reasonable means of direct payment include, for example, a wire transfer or the mailing of a check to the eligible retirement plan. If payment is made by check, the check must be negotiable only by the trustee of the eligible retirement plan. If the payment is made by wire transfer, the wire transfer must be directed only to the trustee of the eligible retirement plan. In the case of an eligible retirement plan that does not have a trustee (such as a custodial individual retirement account or an individual retirement annuity), the custodian of the plan or issuer of the contract under the plan, as appropriate, should be substituted for the trustee for purposes of this Q&A-3, and Q&A-4 of this section.

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Oh, and to answer your questions, jpod, the participant was using the same institution for his IRA that he uses for his personal checking/savings accounts.

Has the financial institution been contacted about correcting the deposit (assuming the funds are still in the account)? Or now that the participant has the money in hand, does he want to keep it?

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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If this is not a direct rollover, then the tax withholding (zero) is in error. Changing the 1099 does not alter that. The error is not in the form, but in the participant and/or the financial instituion.

Altering the 1099 might prompt the IRS to come after the plan for the 20%, which it clearly should not be responsible for.

In addition to the financial institution's error in deposit, the phone call from the participant is suspicious.

I stand by my perspective: the plan did not do anything in error.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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I agree with David Rigby. In fact, if I had to defend the payor here I would argue that, at least constructively, there was a direct rollover completed, but then it was followed instantaneously by a distribution from the IRA to the participant via a deposit to his personal checking account. If any tax reporting needs to be undertaken it would be for the IRA Custodian to file a 1099-R to report the distribution.

I still can't help wondering why the participant called Pam's firm. Pam, what did he want your firm to do?

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I still agree with jpod and David. The plan has the participant's election for a direct rollover, a canceled check properly payable to the rollover IRA custodian and cashed by that institution. A phone call from a participant that he or she misdirected the funds does not create an error on the part of the plan. The error is with the either the financial institution, the participant, or both. jpod's recommendation that the IRA custodian issue a 1099-R is the closest thing to a "correct" way to report what happened.

And even if there is no 1099-R, assuming the participant is correct he should just report the taxable income and pay the tax. IRS may eventually question it when they match up the 5498 (or lack thereof) with the 1099-R, but so what? A response that the participant did not complete the rollover would take care of it.

I carry stuff uphill for others who get all the glory.

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A response that the participant did not complete the rollover would take care of it.

picky detail - From the OP, it looks like the receiving institution did not complete the rollover and that the participant was not a part of the rollover, other than to request it. The receiving account number on the rollover request form was that of the IRA account and not the checking account, right?

I agree that the payor is off the hook on this one.

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My two cents - while the payor clearly did not make an error (although perhaps the check wasn't clearly marked FBO John Doe IRA?) I would be inclined to issue a corrected 1099-R. But first I would want to get find out from all parties involved (the participant and the financial institution) exactly what went wrong...it sounds like the money was misdirected, and perhaps the institution can retroactively put it in an IRA and tidy things up that way. (But I know how hard it can be to get financial institutions to do stuff like that.)

Let's be clear - if the check was payable to "XYZ Bank FBO John Doe" then maybe the payor has some culpability here. That opens the door for a participant to get a tax-free distribution by simply putting what is intended to be a rollover check into a regular account.

(But I do think the IRS would eventually catch up with this since there won't be a matching 5498 showing the rollover in.)

Ed Snyder

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Thank you all for your comments. This has been a very helpful exchange. It is our belief, based on a conversation with the participant, that he does intend to just keep the $ and not roll it into the IRA. The reason he called in the first place was to request a copy of the tax document (1099-R) - which we explained had already been mailed to him. He said that the bank (that he was using to roll the $ to) had told him that he needed a different form since the $ hadn't actually been rolled into an IRA. We are going to inform him that he will have to file his taxes and report the income and pay the applicable taxes. We're taking the stance that we (the payor/plan) did nothing wrong and the responsibility falls with the participant and/or his bank.

Again - thank you all for your feedback!

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  • 7 months later...

...just saw this- result from a Google search for something else. I know this response is too late, but I wanted to add my two-cents anyway.

There is another rule to consider here- banking laws. A financial institution should not deposit a check to an account for one party, when the check belongs to another party. Which is why, if someone makes a check payable to my business, I am not allowed to deposit that check to my personal account ( except in the case of a DBA and such).

The custodian is required to make the adjustment by reversing the amount from the regular checking account and depositing the amount to the IRA. Even if the funds are no longer there , the book entries can be made , so that the required 5498 can be generated for the rollover, and 1099-Rs issued for any distributions.

The plan administrator should not make any adjustments- they did everything right.

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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