Husband and wife IRA rollovers

[Cynchbeast]

We have single person plan covering only owner & his wife. He is terminating plan, and before advising us he rolled over ALL of the money to his IRA. We advised him that some of the money belonged to his wife and that he had to re-open the plan's account to put her money back in so the plan could pay her out.

He of course got it all wrong and transferred money directly from his IRA to his wife's IRA. Not only has the wife never been properly paid by the plan, but we are also concerned about the tax consequences to both of them.

Some of our concerns:

1. Can husband transfer IRA money from his account to wife's?
2. What amount is reported on 1099-R as rollover for husband?
3. Does wife get 1099-R from the plan?
4. How might IRS view the plan in all of this since the plan never actually paid out the wife?

[Mike Preston]

1. No.

2. Correct amount due to husband.

3. Shouldn't.

4. Badly.

[Cynchbeast]

The rollover was done in December and the transfer of money to the wife's account just yesterday. So if we issue a (late) 1099-R to husband for correct amount ($50k), how do we close out 2015? Do we show $75k distribution with a $0 balance and plan terminated, or what?

[Mike Preston]

$25k owed to plan f/b/o wife from husband's IRA plus adjustment for earnings. Pay it. Good luck getting IRA custodian to issue proper 1099 indicating return of excess (not taxable). Then process distribution to wife properly. Show 50k distribution and 25k other expense (label it theft if it gets their attention) with 25k receivable. Final 5500 is now for 2016, not 2015.

[Cynchbeast]

Thank you Mike - this is what we advised the sponsor and how we intended to handle it. Then he went and moved the money directly to his wife's IRA.

So I suppose only absolutely proper way to correct is to have fin'l institution "undo" the transfer to wife, putting money back in husband's IRA, then return wife's portion of IRA to plan as mistake of fact, then distribute to wife. I do believe it is highly unlikely we will get this to happen.

So I have to deal with how to report 2015, and is this a prohibited transaction reported on 5330? (if show, where?). Is this eligible for EPCRS?