DB Plan Overpays lump sum & Participant Rolls into IRA

[Guest jfreeborn]

I have a client (the participant) who received a lump sum payment in December 2007 of around $150,000 from a defined benefit plan, and she rolled that over to an IRA. Last month, the participant received a notice from her former employer that the plan overpaid her by about a thousand dollars, and that the overpayment may be treated as an excess contribution to her IRA, subjecting it to a 6% excise tax, imposed each year until the excess contribution is distributed.

Questions:

What is the best route for the client if she does not want to repay the overpayment?

Can this amount really be treated an an excess contribution?

And even if it can, wouldn't the best fix be for the client to take out the excess amount from IRA and keep it? I doubt the employer would sue over a thousand dollars.

Thanks for any adive you may be able to provide

[Lou S.]

Probably not the best advice but if the money was rolled in 2007 doesn't she have an excess anount for 2007, 2008, 2009 and 2010 already?

I would write the plan and tell them that due to thier error she now owes an excise tax of approximately $250 plus penalties and interest and will now need to consult with qualified tax counsel. She would be happy to return the overpaid funds if the trustees of the plan will agree to pay any IRS taxes, penalties and interest due to the Plan's error as well as paying for all attorney and accountant costs incured in filing the late returns. I'd also request the plan trustee indemnify her against any and all loss she may experience due this error by the plan. Furthermore since 2007 is likely these funds have declined in value if invested in the stock market, I would also mention that the funds returned will be net of any investment loss experiences since December 2007 as well as the cost of the accounting to detrmine such loss.

[Guest jfreeborn]

Probably not the best advice but if the money was rolled in 2007 doesn't she have an excess anount for 2007, 2008, 2009 and 2010 already?

I would write the plan and tell them that due to thier error she now owes an excise tax of approximately $250 plus penalties and interest and will now need to consult with qualified tax counsel. She would be happy to return the overpaid funds if the trustees of the plan will agree to pay any IRS taxes, penalties and interest due to the Plan's error as well as paying for all attorney and accountant costs incured in filing the late returns. I'd also request the plan trustee indemnify her against any and all loss she may experience due this error by the plan. Furthermore since 2007 is likely these funds have declined in value if invested in the stock market, I would also mention that the funds returned will be net of any investment loss experiences since December 2007 as well as the cost of the accounting to detrmine such loss.

Thanks for the reply! How did you arive at the $250 for penalties and interest?

[Lou S.]

Probably not the best advice but if the money was rolled in 2007 doesn't she have an excess anount for 2007, 2008, 2009 and 2010 already?

I would write the plan and tell them that due to thier error she now owes an excise tax of approximately $250 plus penalties and interest and will now need to consult with qualified tax counsel. She would be happy to return the overpaid funds if the trustees of the plan will agree to pay any IRS taxes, penalties and interest due to the Plan's error as well as paying for all attorney and accountant costs incured in filing the late returns. I'd also request the plan trustee indemnify her against any and all loss she may experience due this error by the plan. Furthermore since 2007 is likely these funds have declined in value if invested in the stock market, I would also mention that the funds returned will be net of any investment loss experiences since December 2007 as well as the cost of the accounting to detrmine such loss.

Thanks for the reply! How did you arive at the $250 for penalties and interest?

Rough estimate of $1,000 * 6% * 4 years.

edit: Oh and the $250 is just the estomated excise tax, penalties and interest for late pyament to the IRS would be on top of that. Presumably the first payment should have been 4/15/2008 for the 2007 Excess IRA contribution.

[K2retire]

But to stop accruing those taxes, she needs to get the money out of the IRA, regardless of what she decides about returning it to the employer.

[Kevin C]

Since the excess amount is $1,000, would it be an excess IRA contribution if she did not make any other IRA contributions for 2007?

[Guest jfreeborn]

Since the excess amount is $1,000, would it be an excess IRA contribution if she did not make any other IRA contributions for 2007?

I dont think so b/c her entire contribution for 2007 was a lump sum payout of $100,000 from a DB plan. The plan says they accidentally paid $101,000, so that $1,000 is considered an overpayment/excess contribution.