Return of over-distribution

[Guest Bill]

In 1997 we miscalculated vesting and overpaid a distribution. Now the participant is willing to reimburse the trust for the overpayment. Question is how to handle tax-wise, participant was 1099'd and paid tax in '97. In 1999 does he take a deduction for the returned amount or does Trustee re-issue 1997 corrected 1099 and participant file amended tax return? Anyone been through this before?

[Guest TWR]

In similar situations that I have been in, if the overpayment is not repaid by the end of the tax year in which it was distributed it is considered taxable income to the participant and should be reported as such on their tax return. This means that you do not issue revised 1099-R for the distribution. In the year that the participant makes the repayment they may be able to take a deduction for the taxes that they paid on the overpayment using the "claim of right doctrine". Take a look at IRS Publication 525 under the heading "repayments". I have had tax advisors disagree with this method as well. I would definitely suggest that the participant in question consult with a competent tax advisor before taking action on their own.