Ineligible Rollover ?

[DP]

In Feb 2007 we issued a rollover distribution for a participant in a PS/401k plan after receiving her completed paperwork. The distribution included a 2006 Employer contribution which had not been funded yet.

Around Sept. 1 of this year, the corporation decided they would not be able to fund their 2006 Employer contribution. We amended all the reports. I contacted this participant to let her know she had received $400 too much in her rollover. Also I contacted the company this money was rolled over to and let them know what the situation was.

The participant called today and said she would not be returning the money from her IRA.

My question is how would the 1099-R be handled? Should there be a 1099-R for the eligible rollover amount using Code G. Would a second 1099-R be issued for the $400 as a taxable distribution to the participant?

I need to have my ducks in a row before I call the participant back. Thanks.

[QDROphile]

Please explain how the distribution included an amount that was not yet funded.

[DP]

Please explain how the distribution included an amount that was not yet funded.

All plan assets are in a pooled account. At the time of the rollover distribution, we were under the impression that the 2006 Employer contribution had just been made.

[QDROphile]

Wow. You may have some other issues, such as prohibited transactions, to consider.

[Bird]

I think you are correct - one 1099-R showing a rollover for the correct amount, and another showing the $400 as taxable. I think a letter to the participant saying $400 was not an eligible rollover would be appropriate (but not acknowledging that it's hers to keep).

On the plan side, you have to figure out if you're going to bury it as a gain or have the employer put in $400 as a special contribution for her, or...? But I don't see a PT issue.

[QDROphile]

I think the DOL might see it as a loan to the employer in anticipation of a contribution. I don't see how you can bury it as a gain. I looks more like an operational failure, but consistent conclusion has to be reached. Better that is was a mistaken distribution rather than a deliberate advance against funds to be received. That is a serious conscious error; the DOL would be all over anyone who thinks that distributions can be done that way.

[Kimberly S]

Back when I was working with pooled accounts, we would have required that the plan be made whole. If the participant refuses to refund the excess, then employer should replace those funds. Typcially a letter from the plan's attorney to the the former participant and their IRA provider threatening legal action gets a prompt return of the money.

[Bird]

Better that is was a mistaken distribution rather than a deliberate advance against funds to be received. That is a serious conscious error; the DOL would be all over anyone who thinks that distributions can be done that way.

I'm not convinced it's such a big deal. If the contribution had indeed been completed, I can't imagine any kind of an examination that would compare the timing of distributions against the timing of contributions.

As for the recordkeeping, I agree that the $400 can't be properly buried as a gain. I'd probably want the employer to make the contribution but might treat it as some kind of corrective measure rather than a contribution on my reports...or, a gain because at some point, for $400, you just need to make it go away.

[J2D2]

Everyone seems to be focusing on the employer as the source of any "make good" deposit. Doesn't the TPA/trustee or whoever authorized/made the distribution bear some responsibility for paying out assets that it didn't have?

[Bird]

Everyone seems to be focusing on the employer as the source of any "make good" deposit. Doesn't the TPA/trustee or whoever authorized/made the distribution bear some responsibility for paying out assets that it didn't have?

In my opinion, if the employer says it will make a contribution, then it's an asset of the plan - a receivable. In a pooled account, that asset is indistinguishable from any other asset. I see no responsibility for the error associated with the TPA. Some caution is advisable, of course, but we don't know that the TPA didn't jump up and down and made the client swear on ten bibles that he really would be making the contribution, and warned him of these potential consequences for not doing it, and the client changed his mind anyway.

[Kimberly S]

Everyone seems to be focusing on the employer as the source of any "make good" deposit. Doesn't the TPA/trustee or whoever authorized/made the distribution bear some responsibility for paying out assets that it didn't have?

Many TPAs do not have the funds and have no way of knowing when or if it has been deposited when they prepare distribution paperwork.

[Appleby]

Regarding the matter of the 1099-R, one should be issued with a Code G for only the amount that is rollover eligible.

The letter to the participant should explain that the $400 is not rollover eligible, and that it should be removed from the IRA along with any NIA by the individual’s tax filing deadline-including extensions for the year the amount was credited to the IRA, or be subject to a 6% excise tax for every year it remains in the IRA. The realization that the amount cannot remain in the IRA without penalties usually helps the IRA owner to understand that leaving it in the IRA is not a wise choice.

The IRA owner should contact the IRA custodian, with instructions to distribute the amount from the IRA