Ineligible Rollover

[Randy Watson]

A direct rollover was made from a tax exempt 457(b) plan to a traditional IRA. This rollover was made within the last two months. At this point, I believe the transaction can merely be reversed without any consequences. Is that true? Does anything have to be filed with the IRS?

[mbozek]

If it is not eligible for a rollover it will be taxed as a distribution. Under IRC 4973 6% excess contribution penalty will not apply if amt is paid (with earnings) by 4/15/06. 10% penalty tax is not applicalbe becuase amt is not eligible to be rolled over to an IRA.

[Randy Watson]

Thanks mbozek. A few more questions...is there anyway to avoid the tax on the distribution? Can this somehow be corrected by reversing the transaction (i.e. putting the $$ back into the 457)? Is there any recourse available to the participant against the plan for making the ineligible rollover? Any suggestions?

[mbozek]

The only way to avoid taxation on a distribution is to transfer the funds to another NP 457(b) plan. If the check from the 457 plan has been cashed I dont see how taxation can be avoided. I dont know what recorse there could be against the plan if the funds cannot be rolled over unless you want to argue that the plan should have told the participant that the funds would be taxed if withdrawn.

[Randy Watson]

So you are saying that the only thing the taxpayer can do at this point is to avoid the 6% penalty by removing the excess contribution and earnings?

[mbozek]

yes.

[jevd]

deadline to remove is tax filing date plus extensions. No request for extension is required so normally the deadline is 10/15 of following year for individual taxpayers.