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1099 for 401(k) Plan Distribution


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Client with 2 participant 401(k) Plan where investment company issues 1099's for distributions. Contracts are owned by Trustee, xyz 401(k) Plan. A participant took a distribution during 2014; the 1099 shows the distribution to the Trustee of the Plan rather than the participant. CPA says he needs a 1099 showing distribution to the participant. Investment company insists that the only 1099 they will issue shows distribution to Trustee, xyz 401(k) retirement plan.

What to do, please?

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Sounds like the accounts were set up wrong, or the investment company doesn't know what it's doing, or some combination. "Somebody" (who knows what they are doing) probably does need to prepare a 1099-R for the participant, and maybe an amended one if the first one was an actual 1099-R in the name of the trustee.

Ed Snyder

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Was the distribution sent directly to the participant? Or, did they send funds to the Trustee who then paid the distribution? If it's the first, I would notify the investment company in writing that the 1099-R was prepared incorrectly and tell them how it should have been completed. I would include a copy of page 8 of the 1099-R instructions, with the following paragraph highlighted:

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 2014 General
Instructions for Certain Information Returns or Pub. 1220,
if filing electronically.

If it was the second, the best course may be to notify them that a 1099-R should not have been issued to the Trustee and then, as Bird says, someone needs to prepare a 1099-R for the participant.

Years ago, we had a Trustee who cashed out some funds in an annuity policy held by the plan to fund a participant loan. The insurance company issued a 1099-R to him showing the asset transfer to be taxable. Over the phone, they insisted they were not going to change the 1099-R. After a letter, along with a copy of the instructions and a statement that he hoped he would not be forced to take legal action to correct the matter, they changed their mind and voided the 1099-R.

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About 30 years ago, when I worked for an insurance company and none of the plans were daily valued, etc., the checks for liquidated funds were always made payable to the Trustees of the plan - hence no 1099's as it wasn't a distribution from the plan. Then the Trustees had to issue the 1099's when they paid the Participants. I thought such practices had gone the way of the dinosaurs and compromises in Congress, but perhaps there are some that live on...

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You might want to download the 1099-R instructions, and look at the top of the first page under Specific Instructions. If you are looking for something more specific, like "The investment company gave a 1099-R to the trustee and nobody knows what to do about it" I don't think you are going to find it.

Ed Snyder

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The plan fiduciary should be very interested in all of this because it is a big red flag for failure of the fiduciary to understand and manage the relationships and services among the service providers and how required plan functions are carried out. The fiduciary is responsible and needs to get down to the fundamentals and revise the contracts with the providers if necessary. I realize that most plan fiduciaries do not really understand the arrangements that they buy into and are relying on the providers to do right. That is substandard fiduciary behavior and naive because the providers are going to protect themselves and their business model is something other than meeting a plan's needs.

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This should not be hard to fix. The financial institution needs to either (1) issue a corrected 1099-R, reporting the amount to the participant who received the distribution, or (2) issue a corrected 1099-R for zero - in which case the plan trustee/administrator would need to issue the 1099-R to the participant.

Going forward, if the plan administrator wants the financial institution to report distributions to the participants, the financial institution's applicable operational procedures need to be followed ,

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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