Investment Losses and 415 Refunds

[Guest Luis G]

How are investment losses paid for if participant is due to receive a 415 refund? Does participant still get refund and if so who makes up the loss?

[Guest AFoodman]

After doing some research, we did not take losses into account when refunding excess contributions. Any gains, on the other hand, were refunded to the participant. So if a participant has and excess 415 refund of $500 due, they would get no less than $500, even if their account lost 25% over the past year.

Amy

[Guest Luis G]

What if the participant had elected to invest 100% in one fund (ie. company stock) and that fund had a negative performance? Consider that the negative performance basically left the participant w/o sufficient funds to cover the refund. (Far fetched, but possible,no?)

[david shipp]

I believe that Beavis is correct, and you get there through the 1099-R instructions dealing with handling a loss in the return of excess contibutions. While this doesn't specifically say "415 excess," I think the analogy can be drawn and, absent other direction, this is a reasonable path to follow.

[Guest Beavis]

I don't have a cite at my fingertips for this but I'm pretty sure this is correct...

When any type of excess is being distributed and there is an attributable loss, the check is issued for the net amount (including the loss). The participant will receive a 1099-R for the gross excess amount (not including the loss). The participant is able to deduct the loss amount as a capital loss on their 1040.

[Guest Beavis]

One other point on this subject. I also believe that you can (required???) put an asterisk next to the participant's name on the 1099-R form to indicate that there is a loss attributable to this excess amount.

To be honest, I have not done this, but the people that told me this I believe to be reliable.

Anyone out there have any experience with this?

[John A]

IRS Publication 575, the 1099-R instructions, and Notice 89-32 all seem to be clear that for excess deferrals with a loss, the check should be for the net amount, the gross is reported on the 1099-R and the loss is reported on the 1040. 3items:

1) Why are the instructions silent regarding losses on excess contributions, excess aggregate contributions, and excess annual additions? Should these distributions be for the gross amount rather than the net?

2) Is there any requirement to report to the participant that the loss amount can be reported on the 1040, or does the participant need to figure that out based on their 1099-R showing a greater amount than what they actually received?

3) If the check is cut for the gross amount (the excess unajusted by loss) for an excess annual addition, can the participant still report the loss on the 1040?

[John A]

I now believe that AFoodman is correct regarding corrective distributions for 415 excesses and that these should not only be for the full amount of the excess despite the loss, but that other funds would need to be tapped in the situation that LuisG presents. All other corrective distributions would be adjusted for loss, but 415 would not.

[John A]

The 1999-2000 ERISA Outline Book, p. 5.32, says that this issue has created some uncertainty. The IRS used the word "gains" where it usually uses "earnings." The book takes the position that it would be unfair to not adjust for losses, but does not give any support for interpreting "gain" the same way "earnings" is interpreted.

What are others doing? If you have an excess annual addition with a loss, are you reducing the excess for the loss when you cut the check, or are you cutting the check unadjusted for the loss?