457 plans and 1099-R

[Guest D. Leeke]

Now that 457 plans are required to report all distributions on a Form 1099-R, what codes should be used to report the distributions? Can code 7 be used for all distributions except death, which would use 4? (Unless the distribution contains a rollover from a plan that is subject to the 10% early withdrawal penalty.) If a code 7 was used instead of a code 4 for a death benefit, what impact (if any) does this have on the beneficiary?

[Guest llaplount]

Where did you find the information that states 457 distributions are now to be reported on a 1099-R instead of a W-2. I have reviewed everything I can and have been unsuccessful in locating this information.

Thanks:confused:

[Carol V. Calhoun]

llaplount, check the instructions to the 2002 Form 1099-R and 5498. (The document you will go to if you click on the link is a pdf document, so it requires the Adobe Acrobat reader, a free download, to read or print.) This was an EGTRRA change.

[Guest HFOSTER]

The instructions say governmental 457(B) distributions are now reported on 1099-R. Non-profits still must report on W-2.

[MGB]

Hey, all you reporting experts, here is one I can't figure out.

(Forget any changes under EGTRRA.)

How do you report a distribution on the W-2 that is part nontaxable (lost the risk of forfeiture in a prior year and paid tax then). The instructions indicate it is the "distribution" that is reported in box 1, not the taxable portion.

Two approaches:

1. Only report the taxable portion and then matching up with the amounts shown on the 1040 is no problem.

2. If the entire distribution is reported, then the individual is going to need to attach an explanation to the 1040 showing why the amount reported on the 1040 is different from the W-2.

Although I favor (1) from a common sense approach, we are working with providers that refuse to do this. Which, of course, requires additional education of the individual to correctly do their own reporting on the 1040.

The reporting on a 1099R doesn't run into these problems (plus the individual has a space on the 1040 to report the gross distribution versus the taxable distribution, but doesn't have that luxury with W-2 reporting).

So, bottom line is, what is the correct way to report a mixed distribution?

[MGB]

I am running into the same problem again as my previous post from last year. Does anyone have an answer to this?

The current situation is more complex. The W-2s showed the gross amount paid from the 457 and the participants paid tax on the full amount. However, they have large amounts of basis (previously taxed when the substantial risk of forfeiture went away) and should not have paid taxes again. Obviously, the participants need to file 1040X's to get refunds. But, what do they provide to the IRS? If the payor does not issue revised W-2s with a net amount, how does the participant verify that only part of it is taxable?

Again, should the payor be using a gross or net amount on the W-2 going forward?

[Guest HFOSTER]

Wouldn't you take care of after tax basis by not withholding on that amount? Speaking of withholding, what table should I use to withhold on a 457 non -profit plan distribution (misc?, annual?)

[MGB]

Withholding is not an issue. The issue is what to report in box 1 of the W-2.

[Harwood]

I called the IRS "Information Reporting Call Site" at (866) 455-7438.

A researcher there was well aware of the issue. She said to use " code 7 - Normal Distribution" on a 1099-R when reporting a 457(B) governmental plan distribution [unless the 457(B) money has been commingled with money from a qualified plan or IRA].

She also quoted the 1099-R instructions: "Generally, use Code 7 if no other code applies."

Personally, I hope the 2003 1099-R Instructions will give us explicit written instructions on this issue.

[MGB]

Once again, I'll repeat the question. The problem is not with what code to use...

What amount do you put in box 1? The taxable amount or the gross amount paid? If it is the gross amount paid (which is what the instructions imply, how does the individual reconcile that the amount on the 1040 doesn't equal the amount on the 1099?

[Harwood]

Box 1 is the total amount of the distribution, taxable and non-taxable

Box 2a is the taxable amount of the distribution.

Reminder: "For reporting related social security and Medicare taxes on a governmental section 457(B) plan distribution, see the 2002 Instructions for Forms W-2 and W-3."

[MGB]

Sorry, this is not for 1099 reporting (which nicely have the taxable/gross boxes), but for W-2 reporting (which do not have a similar setup).

[Harwood]

Comparing the 2001 and 2002 W-2 Instructions for Box 11 is all I can think of.

Also, try a phone call to the IRS "Information Reporting Call Site" at (866) 455-7438.