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Corrected 1099-R for Prior Tax Year


Guest CTB
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Background: My client participated in a qualified plan in 2006. Later that year, he left the company and took a full distribution. The plan's administrator issued him a 1099-R indicating that the distribution was eligible for rollover. He did, in fact, roll the distribution into an IRA.

Problem: In 2008, my client's former employer discovered that he was never eligible to participate in the plan. In December of 2008, the plan's administrator sent my client a corrected 1099-R to correct the 2006 1099-R, indicating that the distribution was not eligible for rollover. We presume that his IRA's custodian will subsequently distribute the rolled over funds and issue a 1099-R.

Question 1: Is the plan administrator allowed to issue a 1099-R to correct a prior year's 1099-R? I believe not, but the regulations citation would be much appreciated.

Question 2: Is my client obligated to amend his 2006 tax return as a result of receiving the corrected 1099-R in 2008?

Many thanks,

CTB

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1. If EE was never in the plan, then how could the distribution be from the plan. If it's not from the plan, then it sure isn't eligible for rollover, but what is it? Technically, the plan (not the ER) issued the 1099R, and then amended it. Did the ER issue a 1099MISC, or other form to document the payment?

2. Maybe. Could the amount now become 2008 income??

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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David,

Thanks for your reply. To clarify, the EE was admitted into the plan in 2006. However, it wasn't discovered until 2008 (after the EE left the company in late 2006 and took his full distribution that same year) that he never should have been admitted.

My gut tells me the EE will have income in 2009, when he receives the distribution from the rollover IRA. Does that sound right? I also want to be sure that the corrected 1099-R issued in 2008 does not require him to amend his 2006 1040. Thanks again,

CTB

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Unlikely that anyone on these Boards can answer your questions directly, but some other thoughts:

- Can the plan can issue a payment, and/or a 1099R, to a non-participant?

- Did the revised 1099R change the "rollover" box, or is the form rescinded? Replaced by another form?

- If the plan "recsinds" the 1099R (which is not the same as stating it is not eligible for rollover), who made the payment?

- If the plan recsinds the 1099R and the Employer does not issue a different form, does that mean the entire payment is not taxable to the EE? (Having the money come out of the IRA is not sufficient information to identify what to do next.)

- If the money comes out of the IRA, is it adjusted for earnings (even if negative)?

- If the employer made the payment (rather than the plan), what is the proper form?

- If there was tax withholding (which is required for a payment that is thought to be eligible for rollover, unless the amount is less than $200), where is it, who gets it, who gets it back, etc?

- Perhaps the plan (not your client) should consider an amendment so that this employee's participation was legit (might be too late).

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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  • 1 month later...
Guest Mr. Kite

I don't believe the administrator correctly issued a "corrected" 1099-R, because I don't believe the original was "incorrect." Under IRC 402©(4), distributions from a qualified trust are "eligible rollover distributions" unless the payments are periodic payments, RMDs, or hardship distributions. This distribution does not fall into any of these categories.

The problem here is that the plan allowed a noneligible employee to participate, which is a plan failure that puts the plan's tax qualification at risk -- it doesn't mean that one participant's distribution somehow becomes a taxable payment. (Also, it seems that the company would have issued a corrected W-2 instead of having the TPA issue a 1099-R to "undo" its error).

Sounds like a mess for everybody. But I think the burden is with the plan administrator, not the individual.

Rev. Proc. 2008-50, App. B, section 2.07(3) provides a correction method for plans that allow ineligible employees to participate, but this correction method applies when the employee ineligible only because of age or years of service. But I think this clearly indicates that this is a plan failure. The issuance of a "corrected" 1099-R does not appear to be a proper correction method, and rather appears to compound failure with failure.

I would recommend writing a letter to the TPA requesting a corrected corrected 1099-R, and suggesting that they get the plan corrected through EPCRS before it loses its qualification.

Additionally, I'm not sure of the mechanics of the reporting, but would the "corrected" 1099-R have been sent to the bank holding the individual's IRA? If not, how would the IRA bank learn of the "correction" in order to distribute the funds to the individual?

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