Redeposit of a distribution done in error

[Guest pnnenno]

In 1997 a terminated employee "intended" and requested that the vested balance in his 401(k) plan be rollovered to an IRA. Due to confusion over the way the participant completed the "distribution request" the trustee misinterpreted his intentions and split the distribution between two different financial institutions and sent funds as a direct trustee to trustee rollover.

The trustee of IRA "A" established the IRA and issued a Form 5498 for the amount that they received. The trustee of IRA "B" cashed the check from the 401(k) trustee, but did not establish an IRA. The trustee of the 401(k) issued a 1099-R for the full amount of the distribution in 1997, and then latter issued a corrected 1099-R to reflect the amount that was sent to the trustee of IRA "A".

In 1999, the financial institution holding the IRA "B" funds returned them in the form of an official check made payable to the trustee of the 401(k).

Can the trustee of the 401(k) redeposit this check into the plan for the benefit of the participant?

If lost earnings are added to the redeposit, how should these be reflected in the account of the participant and the 401(k) as a whole?

How does this influence the Form 5500 for 1997 and 1999?

[Guest gpr]

What did institution B do with the money from 1997 to 1999? Has B simply returned the original funds or have they also credited the income for the time they held the funds (who is "adding earnings to the redeposit")? If B invested the funds for the participant, how did they treat the income earned and was it included on the participant's tax return for 1997 and/or 1998? Why didn't B establish an IRA for the participant? When the company issued the 'corrected' 1099-R was it only for the amount rolled to A? What did the company do for the portion sent to B for 1099-R purposes (re-issued as paid directly to the participant?) How did the participant treat it on his tax return for 1997/1998? How did the company treat it on the original 5500 for 1997? Why would you redeposit it without reissuing it immediately?

[Guest pnnenno]

Institution B never established the IRA because the participant never contacted that institution about establishing one. Institution B negotiated the check sent to them probably with the belief that rollover paper work would follow the check. I would assume that they held the funds in some type of house or clearing account. Institution B is not offering to pay any earnings on the funds while they were in their hands. Their position is that they received the funds in error anyway and they are just returning them. The trustee of the 401(k) is the one that is considering paying compensation for the funds while they were uninvested as appeasement to the participant. The correct 1099-R for 1997 was only for the amount that was sent to Institution A. The amount that went to Institution B is in essence "unreported" by virtue of the corrected 1099-R that only reflects the amount sent to A.

The 5500 for 1997 reflected the total distribution, the amount sent to Institution A and the amount sent to institution B.

[Fredman]

IMO, I don't think this needs to be redeposited back into the plan. It looks to me this is more of an administrative issue than plan issue.

How 'bout treating this in the same manner as if the check was lost for two years? The participant was in constructive receipt of their balance when the check(s) were cut the first time.

If you agree with this argument, you could have the original trustee send a check to IRA A and correct the 1997 1099-R to reflect a rollover of the total distribution. Depending on how IRA A wants to handle the 5498 will determine how much "explaining" the participant will have to do on their return/ammended return.

As far as missed earnings, you'll need to determine who's at fault and who's willing to admit it. Obviously the original trustee holds some responisbility, but why did IRA B hold on to it for two years and why didn't the participant realize some of their money was missing.