Non-Resident Alien Distribution

[Nassau]

One of client asked a question regarding an employee who is a NRA and the plan excludes NRA's . The employee is no longer eligible to contribute to their 401K plan after the ESOP was put in place 9/1/2012. The employees 401K deduction were missed and not turned off so the employer continued to deferral pre-tax contributions until 4/16/2013.

The employer refunded the ineligible contributions and earnings that never should have gone into the plan however the refund back to the employee was subject to Federal Taxes at a percentage of 30%

The client question is should the refunded money be subject to Federal Taxes?

[BG5150]

I think the money would have been returned to the Employer. The resultant refund should have gone through payroll. Not a distributions from the plan, therefore no taxes, no 1099-R.