Tax-free rollover eligibility?

[Guest e_d_roberts]

I recently received a letter from a previous employer stating that the 401(k) plan that I had participated in had, from 1/1/95 through 7/15/97, been administered as if the plan document provided for quarterly entry dates. In actuality the plan document provided for semi-annual entry dates.

I began participating on 10/1/96 (quarterly entry). Quarterly entry was expressly stated in the SPD that was provided to me. I terminated in 11/97 and opted to leave my money, which was in excess of $3,500, in the plan. On 10/22/99 I rolled all of my money into a Rollover IRA.

They are now telling me that a portion of the money that they distributed to me on 10/22/99 included ineligible salary deferrals plus earnings and do not qualify for tax-free rollover.

I don't believe that I should be punished for their inability to administer their own retirement plan?

I had made deferrals based on their guidance. Do I have a problem here?

[QDROphile]

Not if you remove the excess and related earnings before April 15 and properly take into account the income.

[John A]

It seems to me that you have 2 choices:

1) Accept that you received erroneous information initially and withdraw the excess contribution to the IRA. You should consult your tax advisor, but I believe you will not incur liability for income tax or the 10% penalty tax on the withdrawal - see IRS Code Sec. 408(d)(5)(B), which I show below but which is pretty hard to understand without help.

2) Contact an ERISA attorney about the evident discrepancy between the plan document and the SPD. I believe there have been numerous court cases involving discrepancies between plan documents and SPDs, but I am not sure how most have turned out.

Let us know what you decide to do.

Here's the code section I mention above:

(B) Excess rollover contributions attributable to erroneous information. If—

(i) the taxpayer reasonably relies on information supplied pursuant to subtitle F for determining the amount of a rollover contribution, but

(ii) the information was erroneous,

subparagraph (A) shall be applied by increasing the dollar limit set forth therein by that portion of the excess contribution which was attributable to such information. For purposes of this paragraph, the amount allowable as a deduction under section 219 shall be computed without regard to section 219(g).