Return of check issued for force payout

[Guest bmurphy]

A DC plan termed last year & we forced paid out a bunch of people whose balances were under 5k. Just this week 2 folks sent back their checks with VOID written across them & signed distribution paperwork to do rollovers. We had given these people numerous chances to respond, and I'd like not to have to re-issue checks at this point unless we have to. If we do reissue as rollovers do we treat the distribution as occurring in 2003 rather than 2002. In that case there is no 1099-R for 2002, correct?

[Guest b2kates]

Cross year distributions do create problems.

I was formerly the Tax Manager @ Bankers Trust responsible for these types of issues.

1. Look at a distribution made during the year 2002 and returned within the sixty day period, then no harm no foul, as the plan could have adjusted its tax withholding deposit during the year.

2. the problem is the distribution that crosses the year constitutes actual reciept, subject to taxation, withholding and reporting. Since the distribution was available to the participant, they are subject to taxation. The issue is mooted if the individual simply makes the deposit to an IRA within 60 days. Just sending the check back does not void the tax consequences.

(personal observation- it appears that the participants are looking for the withholding back).

[mbozek]

A taxpayer is deemed taxed in the year a payment is sent by the payor, regardless of whether it is returned or declared void by the taxpayer since the taxapyer is in actual receipt of the payment. Under case law a taxpayer who receives a payment at the end of 2002 cannot prevent taxation in 2002 by returning the check to the payor in 2003.