Distribution received 2007 and 2006 1099 reported

[Guest kramcon]

I had requested a closing of a former employers 403(b) account on December 18, 2006. The plan document required the plan administrator to verify my % vested in the employers account held in my name (despite my having terminated employment 8 years prior). A week after departing the position the employer participant account was reduced by the un vested % (40% in this case). However, a vesting schedule was always presented along with the quarterly statements stating I was 60% vested. I made sure to call the plan administrator reminding her of the 40% reduction 8+ years ago so to be sure to indicate I was 100% vested for distribution purposes. She stated that AIG Valic (the investment management entity the plan utilized) would know regardless.

I received two checks on Jan 8, 2007, both dated 12-28-2006. One representing the employee participant balances as of 12-28-06 and another representing similar values for the employer participant account. As I had feared, the employer account balance had been (once again) reduced by 40%. Called all involved parties stating the problem and had the check with the wrong figure voided and mailed back to AIG Valic on January 10, 2007. I called AIG Valic on January 15, 2007 and was informed the request had not been approved yet and once it was it would take 5-10 business days to process and mail another check. On January 26, 2007 I received the proper dollar amount check. The check was dated 12-28-2006. A week later I received 2 1099's reporting the distributions and taxes withheld to the IRS. The original (and wrong) dollar amount was stated on the 1099 representing the employer participant account. Approximately 2 weeks late, I received a corrected 1099 (voided the originally filed 1099)

All was good until March 23, 2007 when I received another 2006 1099 representing the corrected distribution check that I had received on Jan 25, 2007. Called AIG Valic and explained that technically they owed me additional money for the use of the funds for 1 month and that since I was a cash basis taxpayer the distribution should not be reportable to the IRS until 2007 (Also AIG Valic would not have been able to accrue the distribution (technically) at 12-31-06 because the distribution had not been calculated until sometime after Jan 15, 2007. I was told the transaction had been requested and originally processed in 2006 so there is nothing they can (or will) do because the error causing the delay in my receipt of distribution funds had not been their fault. Without even considering the time value of money, it doesn't seem proper to report the distribution in 2006 just because that was the year the transaction was requested.

Does anyone have any solutions to offer? Thank you in advance. I am sorry for the length of this Q.

[Disco Stu]

So there are two issues here. The correct tax year for the distributions and the fact that it took AIG an extra two and a half weeks to get one of the checks correct. I think it's pretty safe to say that your chances of extracting any additional money from AIG to compensate you for the time it took them to get you that second check are pretty close to nil.

The tax year for the distributions is more complicated. Once you are in constructive receipt of the income, it is taxable to you in that year. AIG’s position will be that once they put the checks in the mail to you (presumably 12/28/2006), you are in constructive receipt of that income. The fact that you didn’t actually receive the checks in the mail until January, 2007, is irrelevant. I would imagine that they’d also argue that the fact you were owed additional money was irrelevant to the fact that you were in constructive receipt of that income in 2006. The additional money (the improperly forfeited 40%) you were paid in the second check on 1/27/07 is another matter. I don’t see how that amount can be income for 2006. You could not have been in constructive receipt of this income until 2007. You may have trouble convincing AIG of this though.

[Guest Pensions in Paradise]

My advice is to move on with your life.

[Guest kramcon]

My advice is to move on with your life.

Thank you for that well thought out and detailed response to my dilemma. I know now who the authority/cite source expert is, for next time..

[JanetM]

AIG is probably using the arguement that the original distribution was in 2006. Just because they had to correct it in 2007 doesn't change the orginal date or taxable year. As far as interest on the month they held part of you balance, your chances are those of a snowball in Hades.

So like PiP said, get over it and get on with life.

[Guest kramcon]

AIG is probably using the argument that the original distribution was in 2006. Just because they had to correct it in 2007 doesn't change the original date or taxable year. As far as interest on the month they held part of you balance, your chances are those of a snowball in Hades.

So like PiP said, get over it and get on with life.

I have no allusions of grandeur with regards to the opportunity cost or loss of earnings potential on the delayed receipt of funds and AIG reimbursing. I merely mentioned that to AIG as an additional negotiating point supporting my request/view. It was surprising that the rep I was speaking with refused my request to speak with their tax department (am a CPA) and her supervisor. Bottom line I will extend my 1040 as yesterday I received another 1099 for 2006 for the WRONG distribution (which had originally been voided via a corrected 1099) and start the written correspondence chain of frustration.