plan correction and 5500 - HELP!

[Chippy]

We recently received a take over plan with a problem, imagine that!

In 2006, an RMD was accrued for but was never taken. It has been carried every year since. To add to it, , the participant claimed the distribution on his tax return in 2006, even through he never received the money. So, it appears that in the eyes of the IRS the participant is in the clear. (?)

To correct the problem for the plan, what do I do now, 6 years later.

1 - do I amend the 2006 5500 and all subsequent years

2 - can I somehow adjust the 2012 return , probably not, but it's a thought.

3 - have the custodian issue the distribution now but date the 1099 R for 2006? Is that even possible?

3 - some other suggestion?

any suggestions appreciated.

thanks

[Bird]

I would pay it now. But you need to make sure the custodian doesn't issue a 1099 (unless they could do one for 2006).

(I guess I might want some proof that the participant claimed it in 2006...)

[jpod]

I think it's a whole lot trickier than that.

1. It was not taxable in 2006, and it's too late for the 2006 tax to be refunded now (but see #3 below), but if it is distributed now it is taxable now. I think it's unrealistic to expect that the person responsible for tax reporting via 1099-R won't/shouldn't report it on a current year's 1099-R.

2. There is still the excise tax/Form 5329 problem. IRS technically shouldn't care that he paid tax on the amount in 2006; one of the purposes of the MRD requirement is to limit the benefit of tax-deferred compounding, and that goal wasn't satisfied here. On the other hand, I think this sounds like a good candidate for waiver of the excise tax assuming it is paid ASAP.

3. There is a provision in the IRC (Section 1311) that may be used to largely avoid the participant being taxed on the same MRD twice. I am not 100% sure about that, and the provision is complicated, but it should be investigated.

[Chippy]

Sounds like you both agree that the 5500's should not be amended?

They go ahead and pay that payment now, and pay the excise tax or go through VCP. The participant will have to ask his accountant about the taxes on the personal side.

I think they would have just left this go since it's been so long, but since the prior recordkeeper has been accruing for this missed payment, the assets are off and it does need to be corrected.