Distribution

[Guest Melissa Winslow]

I have a 401(k) plan with a participant who is 100% vested, terminated during 1999 and is 60 years of age. The distribution paperwork submitted to the asset custodian did not indicate to the custodian to withhold the required 20% as it should have. How can I "fix" this error? When the participant files his 1999 1040 should he go ahead and pay the tax at that time or perhaps he should cut a check to the plan sponsor for the 20% so that they can make the necessary deposit and prepare Form 945? Also, does the above scenario lead to negative consequences (ie: penalties) for the plan sponsor?

[Ervin Barham]

What you really have here is an overpayment to the participant. The plan administrator/custodian is required to deposit the taxes as if the distribution were done properly. If not, you will have a penalty from IRS.

If possible, the plan should recover the overpayment from the participant. If, as is usually the case, the participant fails to repay, then the plan sponsor will be responsible for making up the shortfall.

[david rigby]

Assuming that the distribution was in cash, because this happened in 1999, it can be reversed and corrected. I recommend that, if the proceeds are still liquid.