Excess contributions & fed tax withholding

[SusanKD]

I recently requested an corrective distribution for a 2009 failed ADP Test. The recordkeeper indicated that no tax will be withheld, even if the participant requested it, on any corrective distributions made prior to 3/15/10. Is this correct since the distribution is taxable in the year distributed? It makes no sense.

[rcline46]

The '10% withholding' rules apply unless the participant elects something else. The participant is supposed to be given to option on the tax withholding.

[BG5150]

How much was the refund? Many places won't withhold on anything less than $200.

[austin3515]

Sounds to melike they are still usign the pre-2008 rules, where no withholding was allowed b/c the distriubtions paid pre-3/15 were tazable in the prior plan year.

My guess is that the person you're talking too wasn't aware of the change.

[GMK]

Many places won't withhold on anything less than $200.

IMO this is sensible all around, but is it approved in writing anywhere? Or is it just a practical (though unsanctioned) practice?

For example, from Publication 575,

for rollover eligible amounts paid to a participant, withholding is specifically not required:

if all distributions paid to the participant in the tax year total less than $200

or if the cash portion of a distribution is less than $200 in lieu of fractional shares (per 3405(e)(8)).

Is it written anywhere that withholding is not required, for example, for a corrective distribution (as in the OP) of less than $200, or if in a distribution of stock plus (less than $200) cash, the under $200 cash portion is for a small non-stock balance instead of being in lieu of fractional shares?

[Tom Poje]

I wrote it in crayon on the back of a napkin, is that good enough?

or see 31.3405© -1 Q and A 14

MUST a plan administrator withold tax....if the amount is less than $200

A. No........

(it gets into an explanation that if multiple checks are cut, the first one or mor might fall below $200, but once you hit that amagic number in total, then you have to withhold.)

[GMK]

I wrote it in crayon on the back of a napkin, is that good enough?

That's good enough for me, Tom.

Thanks for the cite, which I didn't find in my web searches (and which incidently answers the first question I posted on benefitslink).

[GMK]

Darn it. I got so excited that I missed that it doesn't really answer my first benefitslink question.

I get it that there's no withholding if the eligible rollover distribution total for the year is under $200 (per the referenced Q & A 14).

The question I still have is whether withholding is required in the case of an eligible rollover distribution of $200 or more that is in stock and cash, where the cash portion is less than $200. The cites I have found all say that there is no withholding if the cash part is less than $200 in lieu of partial shares, but does it say anywhere (back of a napkin is good) that withholding is not required when some or all of the $199 in cash is for non-stock account balances (without the "in lieu of partial shares" requirement)?

It looks like withholding is required unless the (under $200) cash portion is entirely in lieu of partial shares, but I've been wrong before.

Thanks for any comments.