MRD's- 98 Distribution received 9/99 - 1099 nightmare

[Guest Laura Heinrich]

Our TPA cut checks to 2 participants in 12/98 for their 1998 MRD's. They never got the check or a 1099 so did not consider it when filing 98 taxes. (The distributions were small, $50-100 range.)

This is just coming to light now and our plan has cut replacement checks and recommends that the participants consult a tax advisor re: refiling 98 tax returns.

Our participants are livid, they don't want to refile taxes for money they never received and had no way of knowing to expect.

Our attorney advises us that even though the checks were cut in 98 if the participants never got the money it's too late to count it as 98 income and that the 1998 1099 should be reversed and issued for 1999. Our pension company says this will put the participant at risk for not receiving a MRD when required. Help.

[Fredman]

I think if you read IRC 402(a) you'll find that a participant realizes income when the amount is distributed from the Plan.

I would reissue the check (no 1099) and leave the 1998 1099 alone (except for maybe an address change). The participant will probably have to amend their 1998 tax return. Whoever is at fault for the participant not receiving the check/1099 should offer to pay any amending/late fees.

[This message has been edited by Fredman (edited 09-08-1999).]

[Wessex]

Why would these participants not know to expect an RMD?

[Erik Read]

I would have to concure with Wessex. If the checks were cut in December the participants have obvisously been given RMD's in a prior plan year. First year isn't required until 4/1 of the following year. I'd say these participants should have been on the phone asking for the distributions, or at least their CPA's should have mentioned it if they're worth their money!

[Alan Simpson]

How about the fact that if the distribution isn't made at the appropriate time an excise tax of 50% of the shortfall is imposed on the participant for the tax year that begins with or within the calendar year for which the distribution is required. (Prop Treas Reg 54.4974-2, Q&A-1). While this tax can be waived there aren't any guarantees that it would be.

When the participants who should have received a distribution know this information they may be willing to refile their taxes instead of losing half of the distribution as a penalty.

Just because the checks were cut in December does not necessitate that the participant has received a prior minimum distribution -- perhaps they just didn't wait until April 1 of the next year to take it (it does happen). If this is the case, and the attorney will put his recommendation in writting, then it might be a possibility to just reissue the 1099-Rs for 1999. However, how do you explain everything to the IRS if they come knocking?