How do you correct an excess annual addition when the participant has received a full distribution of their account? The excess occurred in the last plan year so I believe the correction method should be the placement of the excess in a suspense account described in Reg. 1.415©-6, but in this situation are we required to have the former participant give back the excess annual addition (without offsetting for withheld tax)? Any guidance would be much appreciated!

I recently worked with an attorney who had submitted this problem to IRS via CAP. The method suggested by the attorney and approved by the IRS was to request the excess 415 from the terminated participant and if not received, report on Form 1099 as a taxable event for the affected year(s). Needless to say, the participants did not return the money. Now we have to report a corrected 1099 for the year in which the excess was distributed (difficult to locate 1996 tax forms!). It's also going to be a mess for the participant because unless he can convince his IRA custodian (he rolled his excess) to distribute the excess and delete the tax reporting, he will be taxed on the same money twice!