20% Mandatory Tax Credit Distribution - REFUND

[Guest PAINPA]

We have a P/S plan that is unallocated and we prepare the annual part statements and the 1099R's for any distributions.

We made a mistake (in 2005) whereby an employee took physical possession of his money during distribution. We had the financial instituion send the 80% to the EE and 20% to the employer to deposit at a bank for the tax credit for that employee.

Bottom line: Too much taxes were withheld and needs to go back into the plan.

How can I get a CREDIT posted to the ee's account? and somehow get the money back????????? or am I going about this wrong.

[Erik Read]

Wait - I'm confused - 80% to EE and 20% for taxes is right - but then you say too much was withheld or too much was paid for the taxes?

I guess I'm asking if the plan paid 23% for taxes, and still gave the EE 80% of his balance?

[Guest PAINPA]

How it all happened...

We paid out an outstanding loan in addition to his p/s balance that started this whole mess.

e.g. if he had a $2000 outstanding loan we made the mistake by paying him another $2000 instead of defaulting the loan. Of Which $1600 (80%) went to him and $400 (20%) went to employer to deposit at the bank for credit to his name.

The $1600 is one error we are trying to rectify, but how can I get the $400 sent for the mandatory withholding?

Thanks...

[rcline46]

It sounds like the taxes are correct since you MUST withhold on the value of the loan when the participant is paid directly. You need to get the $2,000 back from the participant. File a lawsuit if necessary or else the trustee must restore the money to the plan.

[Guest PAINPA]

The $2000 loan was paid to the ee when the loan was taken a few months befoer this distribution. The error was us paying the loan out again when the ee terminated. The loan was just a memo field showing the outstanding balance.

Don't forget the recordkeeping is being performed by us the TPA on an annual basis.

[Erik Read]

I agree - you need to go after the $2k from the participant, and then he needs to claim the $400 as taxes paid in error or ???? on his annual filing. You paid them on his behalf - so even if you tried to get the $400 back, unless it comes from him, he'd probably still report it as a tax withheld on his filing ....

Sounds like fun.