Excess Contributions - Roth with Loss

[Lou S.]

What happens when a plan fails the ADP test and needs to refund ROTH contributions when there is a loss?

Assume Excess Contribution (all ROTH) is $5,000

Loss on excess is $2,000

Check to participant is $3,000

I understand that the taxable amount is $0 in this case.

What I'm not sure of is -

What hapens to the participant's ROTH basis? Is it reduced by the $5,000 excess or the $3,000 refund?

If it is the $5,000 excess, can the participant claim the $2,000 on their tax return? If yes, how?

What does the 1099-R look like in this case?

I've seen this before on regular K and understand how ROTH with gain works (I think) but I'm perplexed by this set of facts. Any IRS cite would be appreciated.

Thanks.

[Jim Chad]

Lou S

Those are good questions! Have you ever noticed how when someone says that, they don't have a good answer.

I cannot think of anywhere to look for the answer. So here is my opinion FWIW

I think you would reduce his basis by the $5,000 whether the distributed amount is more because od gains or less because of losses.

Anyone else have an opinion? It would be easy to convince me that I am wrong.

[K2retire]

My best guess is that Jim is right, even as the unfairness of that conclusion screams for another solution.