Impermissible Rollover

[DTH]

A plan accepted a rollover that was later found to be impermissible to be rolled into the plan. The regulations permit the plan to distribute the impermissible rollover and earnings.

Does the plan tax report the corrective distribution? Generally, a distribution to an individual from a qualified plan must be reported on Form 1099-R. The Form 1099-R instructions do not address the distribution of an invalid rollover contribution. Also, the final regulations are also silent regarding any tax reporting requirement.

I don't think that silence means that in certain circumstances that the corrective distributions should not be tax reported. Especially since plan earnings are returned.

If the rollover came in as a direct rollover, I am recommending that the impermissible rollover and earnings thereon be returned to the issuing institution with no tax reporting. If the rollover came in as an indirect rollover, then I assume that the impermissible rollover and earnings thereon be tax reported on Form 1099-R.

Please let me know if there is anyone with experience with this. Thank you.