Refunding invalid rollover

[Borsley]

Situation. Client elects to do a rollover out of his 401(k) plan into an IRA. After the transaction has been completed (and the money is in the IRA), it is determined that the rollover should never have been allowed. The funds are being requested back from the IRA custodian.

Question

What consequences are there to the client on any earnings (or losses) that occured while the money was in the IRA (and before it was sent back to the 401k plan)? If the rollover wasn't valid in the first place, it seems to me the same amount should be redeposited back into the 401k plan as came out. ie....if the rollover is invalid, doesn't seem proper the client should be able to benefit from any postive investment experience that occured in the IRA. Similarily, but on the other end of things, what if they took a loss and the gross rollover amount is not still available to move back to the 401K plan?

[Appleby]

Situation. Client elects to do a rollover out of his 401(k) plan into an IRA. After the transaction has been completed (and the money is in the IRA), it is determined that the rollover should never have been allowed. The funds are being requested back from the IRA custodian.

Question

What consequences are there to the client on any earnings (or losses) that occured while the money was in the IRA (and before it was sent back to the 401k plan)? If the rollover wasn't valid in the first place, it seems to me the same amount should be redeposited back into the 401k plan as came out. ie....if the rollover is invalid, doesn't seem proper the client should be able to benefit from any postive investment experience that occured in the IRA. Similarily, but on the other end of things, what if they took a loss and the gross rollover amount is not still available to move back to the 401K plan?

The ineligible rollover becomes an IRA contribution the year it is rolled to the IRA. Removal of the amount from the IRA should be done as a ‘return of excess’ ( removed from the IRA by the individual’s tax filing deadline, including extensions). The removal should include any NIA

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