Leaderboard

There is no guidance (formal or informal) on mergers or spinoffs of safe harbor plans. There was a section reserved in the final regs for it, but the IRS has never done anything with it. The best you can do is to use a reasonable good faith interpretation of the existing code and regs. A new plan would be a successor plan and not eligible for a short initial plan year under 1.401(k)-3(e)(2). Having a final short year for the PEO plan would very likely not be SH under 1.401(k)-3(e)(4). To avoid problems and stay safe harbor, you need to not have two short plan years. Since this is happening mid-year, the only way I know of to do that is to restate the spun-off plan instead of starting a new plan and have the restated plan document mirror the SH provisions used under the PEO plan. The result for participants is exactly the same as it would have been if they stayed in the SH PEO plan. You should be able to change the plan year to end 9/30/19 in the restated plan if you follow the rules in 1.401(k)-3)(e)(3). Others may have different ideas, but that's what I would do.

Certain facts are not clear. Was his designated IRA custodian the same institution at which he has his checking account and it was deposited to the wrong account by mistake? If so, he needs to fight this out with that financial institution. If the IRA custodian is a different entity, then it sounds like he "changed his mind" about a rollover and was able to convince a teller at his bank to deposit it to his checking account. Maybe he had this scam in mind all along and he was able to escape not only the 20% tax w/h but also as far as the IRS thinks he shouldn't be taxed on the distribution, although if it was a scam I don't understand why he would contact you. However, in either case I don't see where the payor has any responsibility to correct the 1099-R because it never should have been deposited anywhere but the IRA to which the check was made payable.