1099 reporting for corrective distributions made under a VCR -- A ques

[Guest kharris]

Last year, our VCR examiner agreed that the corrective distributions we made from our 401(k) plan should not be subject to the 10% excise tax penalty. (we were instructed to distribute the entire ee deferral account w/ earnings) Unfortunately, we do not have this in writing, however, assume this is okay; what code would you use on the 1099R to exempt a participant from the 10% premature distribution penalty? Thanks in advance.

[Fredman]

Assuming that the correction called for the distribution to taxable in the year distributed, the distribution code on form 1099-r would be an 8.

Its also possible that you would need to use a 'P' or 'D' or even to split the gross and earnings up on different 1099-Rs and use a combination of Ps and 8s.

Look on the back of the 1099-R. It gives a brief description of the distribution codes.

All of the distribution codes above (P, D & 8) mark the distribution as a corrective type distribution. Corrective distributions are not eligible for rollover, so they are not subject to 10% premature penalty.

[John A]

What about the 10% excise tax for corrective distributions after 2 1/2 months after the end of the plan year? kharris, did the VCR examiner give you an opinion on this 10% excise tax? If this excise tax does not apply, then what code should be used on the 1099-R?

[Fredman]

The 10% excise tax for late distributions applies only to late ADP/ACP distributions and does not have an impact on the 1099-R. In my experience I have not seen this tax applied to corrections made under VCR (that's not to say it couldn't happen).

This tax is paid and reported by the Plan (on Form 5330), not the participant.

For kharris's situation, the distribution code that he needs to use is most likely an 8.