Distribution improperly exceeded Required Minimum Distribution

[John A]

In a plan that does not allow in-service withdrawals, a participant with a 1998 Required Minimum Distribution of $190 received a $2,000 distribution during 1998. The 1999 Required Minimum Distribution (based on the actual 12/31/98 account balance) was $750.00. The participant was paid $3,000 during 1999.

What are the consequences and correction for this?

Should the 1999 Required Minimum Distribution have been based on the 12/31/98 account balance increased by the amount of the excess payment in 1998 (increased by $2,000- $190)?

Is this a Prohibited Transaction requiring the employer to file a Form 5330?

Is the proper correction to have the participant repay the amount of the excess?

If the participant refuses to repay the excess, may the plan sponsor reduce the year 2000 Required Minimum Distribution amount by the amount of the prior year excesses?

Can APRSC be used or is there another IRS correction program that would be more appropriate?

[KJohnson]

Unless the participant is a 5% owner, this is really no longer a MRD in 1998. You now simply have an in-service withdrawal option in your plan that you were prohibited from eliminating prior to 1/1/99 (or the date of the amendment if later).

I would treat it like any other benefit overpayment and ask for the money back (with interest). 99-31 has guidance this overpayment correction method.

If it is not paid back, I would think that you could offset. The 99-31 overpayment correction method for dc plans assumes that the entire balance of an account was distributed and therefore other participants are "hurt" by any amounts that are not repaid. Accordinlgy the employer has to put back into the plan (in a suspense account) any amounts not recovered.

However, here you really have a stream of periodic payments and the entire account has not been distributed. I would think that you would have a logical argument that the the "adjustment of future payments correction method" in 99-31 could be used even though this method is specified for only db plans.

[Lynn Campbell]

Was the distribution paid to a person who had reached Normal Retirement? If so, does the Plan permit distributions after Normal Retirement even if the employee is still working? This may leave you off the hook?

[Guest]

It gets even stranger than that!

based on your data, ee had to take a MINIMUM distribution. Note the emphasis on MINIMUM. There is no reason a person couldn't get a larger distribution, so you appear to be ok here.

(A larger distribution does not reduce the required distribution in a future year, but I asume that is already known)

so, since you can take a larger distribution, is there a problem at all.

Well, maybe.

Since minimum distributions are required, you can't roll them over, hence there is no mandatory withholding tax. However, any amount above the minimum distribution is subject to mandatory withholding, so you may have a scenario where the required withholding did not take place. you did not indicate whether there was voluntary withholding taking place. If there was, then you a certainly ok.

If there was no withholding, well, the rules are pretty strange. Even if you are using joint life to determine the minimum distribution, to determine the amount of tax, you could pretend the minimum distribution is based on single life, creating an artificially 'larger' minimum distribution, hence a smaller 'extra' distribution that was paid. And, since there is no required withholding for amounts less than $200, you still might not have any withholdong.

generally, the plan administrator (or the payor) will be liable for taxes that should have been paid and any penalties that might exist. On the other hand, sine the participant received a 1099 R, he has probably already paid the taxes. Probably can get by under APRSC, but I'm not 100% sure on that.