Tax Withholding on Corrective Distributions

[Guest rkmarkus]

What, if any, type of withholding should be taken on a corrective distribution from a 401(k) plan due to ADP failure? Does it matter if the correction is after the 2 1/2 months following the plan year end?

[Tom Poje]

my understanding is that there is no 20% withholding, but rather the 10% withholdong for non periodic payments, which could be waived.

[Guest rkmarkus]

If the 10% withholding isn't waived, what is reported on the 1099? The gross amount or net amout? Can a provider automatically apply the 10% withholding without asking for a waiver? If the correction is made after the 2 1/2 months, is that the only time the 10% withholding becomes an issue or does it also apply if corrections are made before the 2 1/2 months?

[Tom Poje]

1.402©-2, A-4 clearly states that corrective distributions are not eligible for rollovers, so there is no 20% withholding.

The ERISA Outline Book adds the following fact- IRS Notice 87-77 states that if corrective distribution is taxable in the year of distribution (e.g. after 2 1/2 months) then the normal withholding rules apply - thus the 10% withholding unless the individual waives withholding by filing the W-4P.

To me, reading that implies their is no 10% if made before 2 1/2 months.

the 1099 is going to reflect the amount of distribution, so I am not sure what would be meant by gross or net amount. you can't pay out an extra 10% form the plan, if that is what you are implying. It is not the same as a hardship.