Plan distribution - Overpayment

[Lori Friedman]

I know that there are several previous threads about this topic. I've searched for and read the earlier discussions, but I can't find a comprehensive answer to my questions. I'm hoping you'll bear with me as I raise this issue yet again.

There's a direct rollover from a QP to an IRA. The TPA goofs and distributes too much money. The individual gets to keep the overpayment, because the plan fiduciaries successfully recover the full amount from the TPA.

1. I'm certain that the overpayment is the participant's taxable income and isn't eligible for rollover. Can anybody cite an authority for this?

2. Would you issue two separate Form 1099-Rs? My thought is to use one Form 1099-R for the amount of the "real" rollover, with Code G, and another Form 1099-R for the taxable overpayment, with Code 1.

3. Doesn't the plan administrator have some obligation to notify the IRA trustee about the overpayment?

4. Does the individual have IRA basis for the taxable overpayment?

I thank you, in advance, for both your help and patience.

[mbozek]

Q. Why do you want to do anything now that the plan has been made whole? If the participant does not have to return the excess isn't it a distribution from the plan which can be rolled over? If he is not entitled to the distribution then it must be returned to the plan because a fiduciary can only pay benefits to a participant. The plan cannot make a payment which is not a distribution from the plan so I dont know how you would code the excess on a 1099-r as an impemissible payment that is not eligible for a rollover. Code 1 applies to a distribution under the plan not to impermissible payments received by a participant.

[QDROphile]

Seems to me that the plan has an operational error. Look at Rev. Proc. 2003-44, which provides information that answers your questions directly, perhaps with the exception of the 1099 questions. Making the plan whole is part of the exercise, but not all of it.

[Guest ActuaryWannabe]

I had this happen a while back, and we ended up reporting the excess on a 1099-MISC rather than a 1099-R. For what it's worth.

[Alf]

The 1099Rs are not correct and have to be amended. The IRA custodian needs to be notified that some $ is not eligible for rollover. The best cite is 2003-44.

[Kirk Maldonado]

I think that the notice indicating the portion of the payment that is not eligible for rollover treatment needs to go to the distributee as well, because it will affect the amount of his or her taxable income. Also, I think you want to build a "paper trail."