tax implications with overpayments

[Guest gnsesq]

if a plan makes an overpayment and then recovers the money over time from a participant, can the plan reduce the amount the participant's taxable income on their future 1099's by the amount of money recovered every year?

[Carol V. Calhoun]

It would appear that this situation should be dealt with under the rules in section 72 regarding recovery of after-tax contributions. If there is a pay-out in year 1, it would be taxable. If the participant pays the money back in years 2-3, the contributions would not (absent a pick-up arrangement), be deductible in years 2-3. However, if there were a further distribution in year 4, the distribution would include a component that would consist of previously taxed (and therefore nontaxable) amounts. The problem would be that the after-tax amounts would normally have to be recovered over the duration of the annuity distributions from the plan, rather than immediately from the next distribution.