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Discovered Mistake After Rollover


sam248

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Hi --

I am looking for advice and/or information.  Here is the situation.  Former employee requests 401K rollover on 12/4/19.  On 12/31/19, funds are erroneously applied to their account.  On 1/16/20 owner of the company approves rollover (signing section 11 of the rollover forms).  All funds (including those erroneously applied) are transferred.  Third-party administration company review discovers the overfunding.  Former employer/company sends notice to former address but former employee does not receive.  Former employer/company hires debt collector to obtain the overfunded amount.

Questions:

1. Does the signed approval to rollover the funds by the owner mean that all the funds (including those erroneously overfunded) are essentially now the former employees?

2. If not, don't these funds need to be transferred back through rollover and not provided to a third-party debt collector through a cash payment?

3. What happens if the funds have lost their value in the stock market since they were incorrectly transferred?

4. Should the former employee have to pay interest to the debt collector on these funds?

Any advice for the former employee?  Because yes, that is me.

 

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14 hours ago, sam248 said:

1. Does the signed approval to rollover the funds by the owner mean that all the funds (including those erroneously overfunded) are essentially now the former employees?

no

14 hours ago, sam248 said:

2. If not, don't these funds need to be transferred back through rollover and not provided to a third-party debt collector through a cash payment?

Um...yeah, I'm uncomfortable with the idea of paying a debt collector.  Did they ask you for the money back politely before going there?

14 hours ago, sam248 said:

3. What happens if the funds have lost their value in the stock market since they were incorrectly transferred?

Well, in a short term scenario, I'd say there is no doubt that losses are not the recipient's problem.  Obviously not (your) fault.  If you were requested to return the money and refused, then I think it could be argued that from that point forward, you have some liabiity.

14 hours ago, sam248 said:

4. Should the former employee have to pay interest to the debt collector on these funds?

Probably not.  Again, I think it depends on when the error was discovered and what happened thereafter.  

I'm just giving gut reactions - I don't know that there are clear answers.

Ed Snyder

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It might be semantics to this ER, but only the PLAN can ask that an erroneous payment be returned, not the ER/plan sponsor.

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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As noted above, the plan can request a rollover (and usually it's through the financial service provider who does so) - AND - if the funds are still in the (IRA) rollover account, the owner now has NON-ROLLOVERABLE funds in that account, triggering an excise tax due each and every year they remain in that account.  If the money went into a subsequent employer's plan, they now have a qualification issue if not corrected.

Debt collector, though, is a bit extreme.  We (a recordkeeper) work with recipient custodians/plans to get the money back (adjusted for losses or gain) - and there is a semi-formal process for doing so (and usually involves hold-harmless agreements).

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Apparently, they asked via email.  However, I blocked all emails from that company address because they fought my unemployment and appeared to be LinkedIn stalking me.  They also may have sent a letter to my previous address; however, it never reached me.  The first time I heard of the mistake was from the debt collector.

I have asked the debt collecting company to put me in touch with the fund manager and/or retirement representative.

So what I am hearing is that the plan manager should have reached out and there is a process.  I have taxes to pay if they remain in my IRA.

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My advice would be to cooperate, but not to the point that it disadvantages you beyond where you would have been had the mistake never occured.  And that's tricky, to say the least.  I doubt the bill collector will just say "sure, you work it out" because then they don't get paid.  Of course they shouldn't have been involved in the first place.  Just be very careful about taking money out of the IRA - if you "just" ask for it to come out, it will be taxed to you, plus subject to the premature distribution penalty if you are under 59 1/2.  It might be ok to take it out as an "excess contribution" (which it is) and then return it.  But you really need some specific guidance from someone who can see the details of your situation.

Ed Snyder

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Unless you opted into electronic notification point out specifically that the first time you were notified was the bill collector as you have no prior written communication from them.

Ask them to indemnify you from any losses, taxes, fees or tax preparation services you may require as a result of their error. Also require them to removed the bill collector and ANY negative reporting to your credit that may result from them having sent this to collections without notifying you in writing that the error had occured.

Tell them while you are happy to return any funds erroneously deposited to your account to the Plan, you will not be dealing with any bill collectors on this matter. Also you will need a detailed accounting of how they arrived at the over payment figure in question and why you are not entitled to that payment.

If they do not agree let them know that your next call will be to the local branch of the Department Of Labor.

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sam248, you should also be applauded for your apparent willingness to "do the right thing". I'm sure that most of us on this Board have experienced similar situations from the Plan side, where participants who were mistakenly overpaid resisted returning these funds to the Plan, resulting in unnecessary time, expense and misery for everyone involved in attempting to recover the overpayment.

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  • 5 weeks later...

Well, I have been willing and open to resolve this through our fund managers.  However, they are requiring that it is resolved by the debt collector who has now added interest onto the payment.  NO WAY!  I refuse to pay interest on their mistake.  Any suggestions?

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If you know the amount, I would talk to your IRA custodian about withdrawing that amount (with earnings) from your IRA as an excess IRA contribution. Let your IRA custodian know that a your prior retirement plan has determined that $X.XX that was deposited as rollover in 2020 was not eligible for rollover and you wish to withdraw the amount prior to April 15th to avoid excess IRA contribution penalties for 2020 and/or 2021. Probably put that in a saving account since you'll likely need to return it to the Plan. You'll want to tax to the IRS custodian such that  they do not generate a 1099-R because if they due, the IRA will think you owe tax again on that amount in 2021.

Next call the local branch of your Department of Labor and ask for their advice.

You'll also want to check your 1099-R(s) carefully which you should be receiving shortly since the Plan needs to mail them to you by 1/31/2021 for 2020 withdrawals.

 

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