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1099-R Distribution Code Questions


Guest AnneC

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We have a number of government DB plans (city, fire, police). The plans are all contributory, and the employee contributions are employer pick-up contributions. I have two separate 1099-R questions.

For surviving spouse pensioners, we have always used "7" as the distribution code. They are receiving a reduced portion of the participant's monthly benefit as an annuity for their lifetime. A few of them have called us saying that the code should be "4". That is what their accountant is telling them. Input?

For refunds of employee contributions, we have always used "7" as the distribution code here too. It seems that it should be 1 or 2, based on a variety of circumstances like age (59 1/2), age at termination (55), police or fire (age 50). whether Alt Payee or beneficiary. My question to the group is, does is make any difference that these are employer pick-up contributions?

Thank you in advance. This is my first post, I hope I was clear.

Anne

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The first code s/b 4

The 2nd, what is the refund for? Is it a testing refund or return of basis of after tax contribution? The former has specific codes depending on the type of refund and year of taxation. The later is whatever code the distribution is supposed to be but you have lower taxable amount (Box 2?) and report the recovery of after tax in a separate box (Box 8?) on the 1099-R

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The Form 1099-R instructions state:

Use Code 4 regardless of the age of the participant to indicate payment to a decedent's beneficiary, including an estate or trust. Also use it for death benefit payments made by an employer but not made as part of a pension, profit-sharing, or retirement plan.

So, if the participant's benefit is paid to their survivor, it seems that code 4 is the correct response. Even if the payment to the survivor is a refund of employee contributions, it is still a payment due to the death of the participant.

Code 2 says:

Use Code 2 only if the participant has not reached age 59 1/2 AND you know the distribution is:

  • A Roth IRA conversion (an IRA converted to a Roth IRA).
  • A distribution made from a qualified retirement plan or IRA because of an IRS levy under section 6331.
  • A governmental section 457(b) plan distribution that is not subject to theadditional 10% tax. But see Governmental section 457(b) plan distributions, earlier, for information on distributions that may be subject to the 10% additional tax.
  • A distribution from a qualified retirement plan after separation from service in or after the year the participant has reached age 55.
  • A distribution from a governmental defined benefit plan to a public safety employee (as defined in 72(t)(10)(B)) after separation from service in or after the year the employee has reached age 50.
  • A distribution that is part of a series of substantially equal periodic payments as described in section 72(q), (t), (u), or (v).
  • A distribution that is a permissible withdrawal under an eligible automatic contribution arrangement (EACA).
  • Any other distribution subject to an exception under section 72(q), (t), (u), or (v) that is not required to be reported using Code 1, 3, or 4.

A distribution to an alternate payee is an exception to the 10% excise tax, so it seems that code 2 is the correct response, if under age 59.5.

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Lou S. - the part that bothers me is the second part of the instructions:

"Use Code 4 regardless of the age of the participant to indicate payment to a decedent's beneficiary, including an estate or trust. Also use it for death benefit payments made by an employer but not made as part of a pension, profit-sharing, or retirement plan."

It is being made as part of a pension plan, not a refund of employee contributions. It's not a lump sum death benefit, it's a surviving spouse annuity.

Regarding the 2nd part, it is typically a refund of employee contributions because of the employee is not vested. Sometimes it is payment to an Alt Payee or beneficiary, or because a VT elects to receive the contributions in lieu of a vested benefit. The contributions could be pre-tax or post-tax or a combination. We do report taxable amount in box 2a, but then we have been using distribution code "7" which I am pretty sure is wrong. Unless there is some loophole for them being "pick-up" contributions.

Thank you for your input!

Anne

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Lou S. - the part that bothers me is the second part of the instructions:

"Use Code 4 regardless of the age of the participant to indicate payment to a decedent's beneficiary, including an estate or trust. Also use it for death benefit payments made by an employer but not made as part of a pension, profit-sharing, or retirement plan."

It is being made as part of a pension plan, not a refund of employee contributions. It's not a lump sum death benefit, it's a surviving spouse annuity.

Regarding the 2nd part, it is typically a refund of employee contributions because of the employee is not vested. Sometimes it is payment to an Alt Payee or beneficiary, or because a VT elects to receive the contributions in lieu of a vested benefit. The contributions could be pre-tax or post-tax or a combination. We do report taxable amount in box 2a, but then we have been using distribution code "7" which I am pretty sure is wrong. Unless there is some loophole for them being "pick-up" contributions.

Thank you for your input!

Anne

I read it that way the first time too. But the sentence you highlighted says it is for payments made by the employer NOT by the plan.

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Also use it for death benefit payments made by an employer but not made as part of a pension, profit-sharing, or retirement plan."

The first word of that sentence is "Also". 1099-R in general is for all pension, profit-sharing and retirement plan payments. A 1099-R with code 4 is also used for certain other death benefit payments by an employer that are other than pension, profit-sharing and retirement plan payments.

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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Thank you for your input. I am starting to be convinced that 4 is the appropriate code for the survivor spouse benefits.

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Lou S. - the part that bothers me is the second part of the instructions:

"Use Code 4 regardless of the age of the participant to indicate payment to a decedent's beneficiary, including an estate or trust. Also use it for death benefit payments made by an employer but not made as part of a pension, profit-sharing, or retirement plan."

For what it is worth my mother receives a pension as surviving spouse after my father died and her 1099-R is code 4. Prior to his death the code was 7.

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Regarding the 2nd part, it is typically a refund of employee contributions because of the employee is not vested. Sometimes it is payment to an Alt Payee or beneficiary, or because a VT elects to receive the contributions in lieu of a vested benefit. The contributions could be pre-tax or post-tax or a combination. We do report taxable amount in box 2a, but then we have been using distribution code "7" which I am pretty sure is wrong. Unless there is some loophole for them being "pick-up" contributions.

Thank you for your input!

Anne

I do not believe code 7 is correct in that case unless the participant is over the age of 59.5

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