changing Lump sum distribution to rollover distribution

[cpc0506]

A client has come to us with this situation:

I have an employee that was cashed out of her prior 401k plan.

It is my understanding that if she wants to rollover the funds to her current (our client's) 401k plan, she would have to make the distribution “whole”. Is this correct?

She would like to sign the check over to her current employer and pay the federal taxes that were withheld along with the distribution check. How long does she have to do this?

How do you fix the 1099 that the prior employer will generate for 2010 for a distribution, which they thought was a lump sum and is now a rollover to another qualifed plan?

Thanks for your help

[david rigby]

Not sure the 1099 needs to be "fixed"; it reflects the actual distribution. After the fact, the participant has decided to rollover (whether to IRA or to subsequent employer plan) all or a portion of the original distribution. These are separate transactions. Whatever portion of the orginal amount is not rolled over will (probably) become taxable income. Details of that is the responsibility of the individual, not the subsequent ER or plan.

Your questions might be getting pretty close to giving tax advice. Sometimes the best answer is to refer to other sources of information, such as this link to IRS forms and instructions: http://www.irs.gov/app/picklist/list/formsInstructions.html

[QDROphile]

The tax notice that is given before the distribution election explains the rules, including what happens if the recipient does not give direct rollover instructions and then wants to roll over the entire distribution. The plan should say no more.

[masteff]

a) The Participant has 60 days from the date of distribution to complete the rollover, including making the withholding "whole". This is what is sometimes referred to as an indirect rollover.

b) The participant uses lines 16a and 16b on Form 1040 to report to the IRS that she rolled over the distribution. Per the instructions for Form 1040, enter the amount from the 1099-R box 1 on line 16a, then subtract the amount rolled over to another plan and enter the remaining amount even if zero on line 16b and write "Rollover" next to line 16b.

Also refer to the section on rollovers in IRS Publication 575 http://www.irs.gov/pub/irs-pdf/p575.pdf

Edit: and just to be clear, the prior plan DOES NOT change their 1099; see b) above.