Employer overpaid $6000 on ESOP distribution that I rolled to IRA

[joshgoldeneagle]

One year ago I received ESOP distribution from my former employer that I rolled over to a traditional IRA. Today I received a phone call from the company that maintains my IRA saying that the employer overpaid, and that want $6000 back.

If the error is correct, I have no problem giving back the money, but I obviously I do not want to pay tax penalties for making an early withdrawal from IRA.

Will there be tax penalties, and if so, who would be responsible for paying the penalties? Were does the law stand in this unusual case?

Is the law different in different states? I live in Oregon.

[Lou S.]

IF it was an overpayment the excess should be returned to the plan as a trustee to trustee transfer. There should be no tax implication to you.

[david rigby]

Request documentation of the nature of the overpayment, not just the amount.

In writing.

From the ER, not from you IRA holder.

[jpod]

Take this for what you feel it's worth, which may be nothing. It is quite possible that the employer contacted your IRA custodian because it is attempting to comply with the requirements for correction of an operational error vis a vis the ESOP. It is possible that the employer is just going through the motions and has no expectation that you will agree to return any money, and is prepared to make the ESOP whole by funding the amount itself. You may wish to wait for a second request from the employer before you respond or do anything, which second request may never come. Also, there should be no chance that your IRA custodian would ever send any money to the employer, to the ESOP, or to anyone else absent your written direction.

[joshgoldeneagle]

David, I will definitely want to see documentation of the exact nature of the overpayment in writing.

Lou, If I repay I will do trustee to trustee transfer. I will not take any distribution.

Jpod, I will pay them back if it was an honest mistake on their part, even if I could get away with it. But I need to understand the exact nature of the mistake clearly.

I just don't want to take a distribution, and pay a tax penalty for something that wasn't my error.

Thanks for the info!

[david rigby]

By the way, there have been some similar discussions; here is one:
http://benefitslink.com/boards/index.php/topic/50724-overpayment/

[jpod]

All I am suggesting for you to think about is to wait for a second request. If a second request never comes, will you feel guilty in any way? As a matter of fact you never received any request. It wasn't really appropriate for the employer to contact your IRA custodian, at least without contacting you simultaneously, and evidently that didn't happen.

[joshgoldeneagle]

Hello jpod,

Apparently I am getting something in the mail from my former employer in the next few days. Yes I could certainly ignore it, and see if they threaten legal action or send to collections agency. For now I will just see what the letter says if and when it arrives.

[ESOP Guy]

I rarely disagree by name but I disagree with Jpod on this one. Josh I agree you have every right to protect your interests. As such you should ask all the quesitons you need to determine you really were overpaid or not. But if you owe the plan money you should pay it. This is simply good ethics.

I have been on both sides of this. I have made mistakes that have caused participants to be overpaid and underpaid. If I find a person is underpaid I work to get them paid. The reality is I could many times let ignorance be bliss tell no one I made a mistake and no one would know there was a mistake and an underpayment happened. I don't let it happen.

I have made mistakes where a person was overpaid and was relieved when they agreed to repay the money that was a mistake.

And yes you shouldn't have to pay taxes if the IRA returns the money to the plan via a trustee to trustee transfer.

[QDROphile]

Bravo!

[mbozek]

Fact that employer contacted the IRA custodian is a sign that the plan/employer is playing a weak hand and is hoping that you will give up the 6k with no questions asked. Employer/plan administrators try to trick employee to return funds to avoid having to create a paper trail that can be audited by regulators. Plan should have sent you the letter explaining why the amount was overpaid before contacting the IRA custodian. Employer is behaving stupidly because custodian cannot transfer 6k back to plan without your consent. Best course of action as has been recommended is to do nothing and wait for the letter. As of now you received the distribution that you were entitled to under the plan and that amount was reported to IRS.

Q can you document that the amount you received was part of your account balance when you terminated from the plan, e.g, quarterly or annual statements? As noted by another poster the employer may be going through

the motions of trying to correct an operational error and will not take any further action to collect the excess if you don't return the 6k.

Please report back to us when you get the letter as to how you received the excess 6k. One thing you should get an answer to is how long ago the mistake supposedly occurred and why it was not discovered until now.

[joshgoldeneagle]

Here are the key parts of the letter I just received:

"...As part of the annual audit process, it was discovered that the Other Investment account did not have earnings properly credited to all participants. The revised ESOP statement shows the proper crediting of the earnings, and is an accurate picture of your 2013 account in the ESOP.

Also enclosed is the 1099-R From documenting your correct distribution from the ESOP... If you rolled over your distribution to an IRA or another Retirement Plan, a letter has been sent to your IrA provider or REtirement Plan requesting reimbursement of the overpaid amount.

Should you have any questions do not hesitate to call me..."

Here is text of the letter to the company that holds my IRA received:

Dear Sir or Madam:

We hereby indemnifies and hold harmless (IRA provider company name) against all loss, liability, costs, actions, suits, damages, charges or expenses, which you may incur by reason of returning an overpayment of benefit to (my name).

Employee (me) was overpaid his benefit from the above mentioned retirement plan in error. Therefore, the amount of the overpayment should be paid back to the retirement plan. Please make the check payable to (employer name)...

If the overpayment is not repaid, the IRA to which these amounts were rolled could end up being taxed in its entirety, as an ineligible amount was deposited to it.

Thank you for your cooperation in this matter."

[mbozek]

LOL. the IRA custodian cannot pay the plan because only you as the owner can request a distribution.

What is the other investment account referred to in their letter?

What earnings were not properly credited to which participants? The letter does not specifically state that your account was overpaid which implies that the plan cannot determine if earnings from another participants account was deposited in your account. The language of the letter is cleverly constructed to avoid misrepresenting the facts which would be a breach of fiduciary duty.

When did this mistake occur? How did it occur? When were the excess earnings contributed?

Are they saying that you were credited with another participants earnings?

The letter is too vague to render any conclusions as to whether you were overpaid.

The language of the letter indicates that plan admin/employer is desperate- even if the $6000 is not part of your distribution, only the $6000 is an excess contribution subject to a 6% penalty tax. The other assets in the IRA will not be taxed.

[My 2 cents]

You may want to watch out - when the letter to the IRA provider says that retaining money in the IRA that was not eligible for rollover could jeopardize the tax treatment of the IRA, they may be right. Even if the consequences would only apply to the portion that was not eligible, the investment earnings on that money are probably not eligible for any tax deferral. I am not a lawyer so don't rely on what I say, but do watch out.

[mbozek]

IRS pub 590A P 35 simply lists an improper rollover as an excess contribution. Penalty for excess contribution is 6% tax each year until it is removed.

[ESOP Guy]

I stand by my advice. Feel free to ask as many questions you need to get comfortable to determine if you owe the money or not. If you conclude you owe the money work to return it and if not explain to the plan sponsor why not.

You now know the basic issue. Your account had both cash and stock in the plan. They believe the earnings on the cash was flawed. If you want to know more details of that flaw ask. There is a chance you won't fully understand the issue but you might understand it.

The one oddity in my mind is the timing. ASSUMING (if you are willing to tell us if this assumpstion is true or not might help a little) the plan year end is a 12/31 plan year end the letter seems a LITTLE slow in being sent. The annual audit for a 12/31/2013 plan year end would have been done by 10/15/2014 if they filed their plan tax form timely. So why send the letter now? A little slow but not unreasonabley slow.

I would still recommend you start by calling your former employer and asking them if you can talk to the person who can help you understand what happened and maybe help you get enough documentation to help you feel comformtable with the issue.

But no they will not ever share with you work papers and so forth that allow you to recompute the error size. They should be willing to help you understand how the error happened and how it got past everyone's checking process. However, understand part of the process is the plan was required to be auditted by a CPA firm and they typically check earnings allocations. So the audit is the last check that is supposed to help find these errors

[mbozek]

Why should the OP even respond to the employer when the employer is attempting to negotiate with the OPs IRA custodian to have the funds returned which is not legally possible without the OP's consent? Employer cannot make an end run around the IRA owner. OP should not respond to employer and only send a written instructions to the IRA custodian that he will not consent to a return of funds in his IRA.

One real glaring reason not even to consider returning the funds is that the employer wants the IRA custodian to send the check to the employer which would be a taxable distribution for the OP. The author of the letter to the custodian requests the check to be sent to him. How does the OP know this is not a scam being run by a rogue employee? There is something wrong with the entire process of this request to return the funds to the employer instead of the plan which is the legal owner of the plan assets in addition to the employer avoiding discussion of the return of an overpayment with the participant.

If the employer will not give the IRA owner the curtsey of requesting the return of the excess distribution there is nothing for the OP to discuss with the employer who is not even the plan administrator. It seems to me by the way the employer is sending its messages that the employer representative wants to avoid discussing the specifics of how the overpayments occurred which is enough for me to turn on my search radar.

I have been involved in cases where funds in one employee's account were mistakenly paid to another participant and situations where the plan could not determine who was overpaid. In the latter case the plan always eats the loss.

[joshgoldeneagle]

Hello,

Thanks for all the excellent detailed information. So can someone refresh me on the tax penalty(s) I might pay if I decide to keep the $6000 in the IRA?

[GMK]

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits