What year is it taxable?

[Guest A_Dude]

We have an issue with a particpant who is due a 401(k) refund for the 2012 plan year (nondiscrimination failure). He retired in 2012 and rolled his money over to an IRA during 2012. So, the refund is being issued from the IRA in 2013 before April 15th. Is this taxable as a 2012 distribution becuase post circumstance have made it ineligible for rollover? Or is it taxable in 2013 becasue is is now deemed ineleigble for a rollover and must be a distributed by April 15th to avoid penalty taxes?

It make sense to see it one way as the 2012 situation. However, it seems unfair and impractical to come to that solution. Since, a participant who still has money in the plan would get to declare it as 2013 income in this situation it should be the same for the seperated participant who rolled over his money. This solution makes the situation a lot easier to deal with administratively, tax wise, and a level playing feild with others whom must recieve corrective distributions.

Which one is right?

[Lou S.]

Don't you by rule issue corrected 1099-Rs? Wouldn't that by default mean income would be in the year received which was actually the prior year? At issue is money went into his IRA that was not eligible for rollover, you just didn't know it until the testing was completed.

[Guest A_Dude]

But, could you not also say the income was distributed in 2013 from IRA as income, since the declaration that it is not eligible for rollover is determined in 2013 after the end of the plan year? It seems unfair that if he were leave his money in the plan, that he could declare it as 2013 income in this instance.

[masteff]

Try page 7 of the 1099-R instructions, "Failing the ADP or ACP Test After a Total Distribution". http://www.irs.gov/pub/irs-pdf/i1099r.pdf

[Jim Chad]

Masteff, Thank you for the link. This was something I had no idea about.

[Guest A_Dude]

Masteff,

Thanks for the answer!