Excess Contribution

[Guest Rutager]

Joe - an HCE puts $15,500 into 401(k) in first 3 months of 2008. Joe quits company April 1 and takes full distribution of his account on June 1. Joe rolls entire balance over into IRA.

February 1, 2009 - Plan runs 2008 ADP testing and fails - Joes is required to receive refund of $1000 for failed ADP but he no longer has money in plan.

Investment company has already sent Joe 2008 form 1099 showing full amount of distribution rollover to IRA.

Question - I can notify Joe of his failure & tell him the amount he has to have his IRA custodian pull out of his IRA account but what do I do about the 1099's?

Does origianal investment company have to issue an amended 1099 due to the change or does that original 1099 just remain the same? Does IRA provider have to issue a 1099 for the removal of the funds from the IRA and then just be sure to code it properly with a code P or D and it become the employoees responsibility to handle properly for tax purposes.

What if Joe took cash distribuiton?

Just wondering on what others do in this situation.

[Kevin C]

Is Joe under age 50 as of 12/31/2008?

[Guest Rutager]

I'm assuming he is not catch-up eligible - I'm mostly concerned about handling the 1099's.

[ERISAnut]

You should issue a correct 1099-R to reflect the corrective distribution amount. Once this is done, he will receive two 1099-R Forms, one with the 'eligible rollover amount' and the other with the 'corrective distribution amount'. The participant should be instructed that the corrective distribution portion is taxable and not rollover eligible.

From there, he may choose to attempt to recover those amounts from his IRA, since they are not rollover eligible, or may leave them inside the IRA as a non-deductible contribution (where he would file his form 8606).

I would only worry about correcting the 1099-R forms and properly communicating the situation. The choice of how he amends his return and handles the IRA should be a conversation between he and his financial advisor.

[fiona1]

Here is how we handle this situation...

First, say that the plan recordkeeper is A and the financial institution that Joe rolled him money to is B.

When A processes the distribution from the plan and rolls it over, they issue a 1099. In this example, we'll say the amount of the rollover is $45,000. The distribution code on the 1099 is G for rollover.

When it's realized that Joe is due an excess contribution refund, then that means $1,000 of the $45,000 distribution was not eligible to be rolled over. The recordkeeper (A) will notify Joe that he needs to have B return $1000 back to him.

Also, A will adjust the original 1099 - showing the distribution of $44,000 instead of $45,000. They will then create a new 1099 in the amount of $1000 - with a distribution code of P or D.

The financial institution (B) would then just return the $1,000 to Joe and they will not need to issue a 1099 for that.

Like I said, that's what we do (as A).