Excess distributions before 2 1/2 months

[Brian Gallagher]

I just had a comptroller yelling at me becasue my company processed an excess (adp) check on march 9. he said that unless the check was sent certified mail, the irs adds seven days to the check date as the date received. thus, he says, some participants rec'd their checks march 16 (7 days after mar 9).

has anyone ever heard of this? i always thought it was the "mailbox" rule, that is, the check date is the guiding factor.

[Blinky the 3-eyed Fish]

You are right. Feel free to call the comptroller and yell at him.

[WDIK]

Serenity now!

[Brian Gallagher]

You wouldn't happen to have a citation, would you? I'd like to have some backup in case he calls back before my ERISA atty's have a go at him.

While we are on the subject:

When we do excesses before Mar 15, we send a letter saying that the money is taxable in 2003 (comptroller agrees). We also state that in 2005, the participant will receive a 2004 1099-R. (comptroller doesn't like that one bit)

He says that no one can submit a "complete tax return per the IRS" without that 1099-R and that the people will have to pay the 10% premature penalty this year, and wait until next year (when they get the 1099) and file an amended return to get the money back. AND, get this, that my company (by law, because we did not furnish the tax documents timely) has to pay for that amended return!

any thoughts?

[Guest JCatt]

Refer him to page 9 of Publication 525, available at the following link. Filing an amended return is recognized by the IRS as standard operating procedure in these situations.

http://www.irs.gov/pub/irs-pdf/p525.pdf

[pmacduff]

Brian - If you read the instructions for the 1040 form - it refers to the fact that the 1099-R NEED NOT BE ATTACHED to the tax return. I don't have one handy to give you an exact cite, but it is in there. I think the IRS used to want them attached if there was any withholding done, but I don't even think you have to do that now. So even if the participant had received a current 1099-R form, he would not be submitting that form with his return, only keeping it for his records and backup. Again - if you check the 1040 filing instructions I think you will find the reference.

[Demosthenes]

How about logic? One cannot report a distribution physically made in 2004 on a 2003 form. The 2004 form does not yet exist. Therefore, the distribution cannot be reported until the forms are available in 2005. Q.E.D.

I expect that this will be too convoluted for your comptroller to comprehend. Try

Notice 89-32, 1989-1 C.B. 671; Notice 88-33, 1988-1 C.B. 513; Notice 87-77, 1987-2 C.B. 385 and the Regulations under sections 401(k), 401(m), and 402(g).

[pmacduff]

Brian - It is on page #59 of the attached 1040 instructions under return assembly. Also - it does refer to the fact that the 1099 form should be attached if any tax was withheld. But let's face it, by the time the individual might be audited, they will have the form in their possession for backup. I've also had participants tell me that they submit a copy of the letter they receive with the excess check (telling them it is taxable in the prior year) with their individual return. My personal opinion is that it should not be necessary to file an amended return unless the participant had filed before they were aware of the refund.

[Guest Tinman42]

The correction distribution just has to be made within the 2 1/2 month period - not received within the 2 1/2 month period (only cite I can quickly give is the 2004 ERISA Outline Book, 11.157).

As far as you second issue, we send a "notice" along with the checks showing the excess amount and the gain/loss amount calculated on the excess. The notice states when the amount is taxable and what it's from. Many of our clients make a copy of this notice and include it along with their taxes to document the addition of the income due to the excess refund.

Don't you love it when people hire you to do a job - and then wanna tell you how to do it!! Good luck!