Adventures in 403(b) Plan Compliance

[EPCRSGuru]

I'd love to hear some thoughts on this situation involving an employer-funded 403(b) plan in a multi-vendor environment.

Participant wants to transfer assets from his retirement plan account with Vendor A into his retirement plan account with Vendor B. When completing the transfer form he inexplicably includes his retail IRA account number with Vendor B. Vendor A receives the transfer form and processes it as a transfer, BUT includes the retail IRA account number on the check.

Vendor B receives the check, sees the retail account number, routes it to their IRA department, and deposits it to the Participant's retail IRA. This is not discovered for almost 11 months, well into the next plan year. By the way, Participant is actively employed and ineligible for any kind of in-service distribution.

We know that the transferred amount needs to come out of the IRA and back to the Plan. We believe that the earnings must also come out of the IRA and into the Plan. Question--how to treat the earnings on the impermissible deposit? Are they transferred tax-deferred into the Plan? Or do they come out as taxable income to the Participant, generate a 1099, then go into the Plan as post-tax money? (The Plan does not currently provide for post-tax sources.) Vendor B and the Plan Administrator disagree.

[Guest Laurel]

Rev. Proc. 2008-50?