Can the ineligible contributions made to a rollover IRA (due to excess

[Guest lavander30]

I was talking to a colleague regarding a situation that he is experiencing on the 401k - side of a transaction.  The IRA rollover - side has me wondering if my train of thought is on the right track.  Can anyone refute or substantiate a client's ability to request a recharacterization in this type of situation:

 

Client Daisy Dasher had participated in her ER's 401k plan and exceeded her calendar year deferral of $10,500 in the Plan Year End (PYE) 2000.  She separated from service in 2001 and elected to rollover her vested account balance to a rollover IRA. Ms. Dasher is not an HCE.

 

November of 2001, the Year End testing for the 2000 PYE is complete and reveals the excess contribution by Ms. Dasher. 

 

There are several issues to be taken into consideration:  tax reporting requirement (401k admin or IRA Trustee), accounting for correction within the 401k Trust, Rollover of assets that are not qualified to transfer to an IRA, and other individual tax issues to Ms. Dasher.

 

Please check my thought process in one possible solution that I devised based on my understanding of both IRA and Qualified Plan regulations:

 

1)  No Funds Need Be Distributed, Returned - IRA deposit does not need to be voided

 

2)  401k administrator should void out rollover distribution.  correct systems to reflect a correction/distribution of excess deferrals to participant from the Plan Trust.  re-enter request for rollover distribution for the X dollar amount qualified for rollover and enter the Y remainder as a taxable distribution to the participant.

 

3)  As long as EE had earned income in 2001 (or) assuming that she will earn wages in 2002:  Ms. Dasher may request the IRA Trustee to Recharacterize the assets received in the rollover.  X dollar amount indicated as a rollover contribution and Y dollar amount recharachterized as either a 2001 or 2002 Traditional IRA Contribution (depending on whether max. 2001 contrib. has been made).  Pre-2002, this account would no longer qualify as a conduit IRA - but post 2002 will be of no mind.

 

4)  Prior administrator fulfils their duty to correct/report appropriate disposition as to avoid disqualification.  Ms. Dasher and IRA Trustee avoid accelerated taxable

status of IRA assets.

 

5)  401k ER has excise tax issues to be addressed with Plan Admin.

 

6)  Ms. Dasher has tax filing issues to be addressed with her qualified tax advisor or accountant.

  

Is this too simplistic to be make into reality?  Is there an issue with the one check that was sent from the 401k Admin. to the IRA Trustee?  Any other issues that I have forgotten to take into consideration?  What if the distribution had actually occurred in 2000 instead of 2001 and a 1099 Form has been issued?

This is not a real situation for me, but I just have not been able to stop running different "fix-it" scenarios in my mind. I really need to find more interesting things in my life to keep me busy! Please help me sleep again at night!