Distribution reported incorrectly to client

[doombuggy]

Ok, here's a good one that I hope you guys can help me with. We processed a distribution on December 15/16 (guy had forfeitures). On December 17, a letter was sent to the client, instructing them to cut a lump sum check and also cut a check for taxes from the plan's check book. Unfortunately, the distribution form asks for a rollover to be processed. The person who wrote the letter did not notice this, apparently.

I was getting my 1099R files ready to print, and noticed the discrepancy in codes (Relius is telling me "G," but my data sheet says"1"). The tax check has already been cashed, and most likely, this client has already processed their last pay for the year. If this participant calls requesting a correction, how can this be corrected? Any ideas?

Thanks for your help!

[TBob]

Assuming that the participant actually notices that the distribution was not directly rolled over and asks you to reissue the check as a direct rollover, I think you are obligated to do it.

I am not sure what the clients last payroll has to do with it. In my experience, we always kept withholding for the qualified plans separate from the employer's wage withholding. I assume that you are saying that there is no more withholding that is going to be done this year which you could deduct your previous overpayment from.

Anyway, you can probably stop payment on the participant's check (again assuming they have not cashed it) and reissue as a direct rollover. You will have to ask the IRS for the erroneous withholding back. If memory serves me, I think you use Form 843 for this purpose and may need to look at Form 941C as well. The IRS has never been as quick at sending money back as they are at collecting it so you may need to consider putting the W/H into the plan to make it whole until the IRS sends you your refund.

[doombuggy]

I found the forms you mentioned, TBob, and called the participant. He cashed the check. Even though it was a lump sum, and that is not what he really wanted.

So, thanks for the info, I have filed it away in case this happens again!