DB distributes too much to a retiring participant

[katieinny]

A retiring participant in a DB plan rolls her lump sum distribution into an IRA. Several months later it's discovered that the actuary made a big mistake (in the participant's favor) when calculating the lump sum. Several more months go by before it is determined that the excess distribution cannot be recaptured (long story -- that's not the question anyway).

Does the fact that the lump sum consisted of more than the participant was entitled to put the IRA rollover in jeopardy? There were no adjustments to any tax forms and the plan was a qualified plan. A devil's advocate is raising the issue because he thinks it could be determined that the IRA holds an excess amount. I say baloney.

[david rigby]

Does the inability to "recapture" change the correctness of the distribution?

If the payment is incorrect (more accurately, too much), then the IRA rollover is incorrect.

Whether the plan administrator does anything about it may be a different issue, no doubt with advice from the Plan's ERISA counsel.

[masteff]

Our SOP would be a letter to the participant that $xxx is rollover ineligible and if rolled over should be removed.

[katieinny]

I've been reading the rules about QP distributions that are and are not eligible for rollover. I don't see anything indicating that if a plan distributes too much the entire amount of the distribution can't be rolled over.

[Guest Robin.Wolf]

Try reading Rev. Proc. 2006-27--I believe the relevant info is in Section 2.04 of Appendix B. My experience is with defined contribution plans, but my understanding is that in the case of an overpayment the plan sponsor has an obligation to attempt to recover the money, and if they cannot, they need to notify the participant that the funds are not eligible to be rolled over into an IRA. An additional/amended 1099-R might be required as well. Might be time to get an attorney involved.

I've been reading the rules about QP distributions that are and are not eligible for rollover. I don't see anything indicating that if a plan distributes too much the entire amount of the distribution can't be rolled over.

[katieinny]

Robin: Yup -- that's where it was. Thanks for pointing me in the right direction.