Entitled to Rollover Treatment?

[JustnERPA 7]

A fully vested NHCE participant, age 59.5, requested an in-service distribution last year of their entire account from a 401(k) plan, to do a direct rollover to an IRA. The plan sponsor approved. However, the plan does not have an in-service option at age 59.5, it has age 60 for some reason. They did not reach age 60 until this year. They currently do not intend to pay it back to the plan.

EPCRS, Rev. Proc. 2019-19, 6.06(4): Make-whole contribution. To the extent the amount of an Overpayment adjusted for Earnings at the plan’s earnings rate is not repaid to the plan, the employer or another person must contribute the difference to the plan. The preceding sentence does not apply when the failure arose solely because a payment was made from the plan to a participant or beneficiary in the absence of a distributable event (but was otherwise determined in accordance with the terms of the plan (for example, an impermissible in-service distribution)).

To me, the above (bolded) means the employer does not need to repay the amount to the plan. Let me know if you disagree.

The question I have is the tax reporting of the distribution. Was it actually rollover eligible? Or because it violated the plan's in-service provision, is it to be reported as taxable? Would the answer change is this was distributed in error before age 59.5 and the payout included deferral accounts?

[C. B. Zeller 75]

How about a retroactive amendment to allow distributions at 59-1/2?

[JustnERPA 7]

Tried. The plan sponsor does not want to do that. The main question is whether or not the distribution was truly rollover eligible or not - how should the 1099-R have been prepared?

[Mike Preston 415]

If client doesn't want to correct via SCP (which requires an amendment) then VCP is only option.  Otherwise it was not eligible for rollover.