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Deferrals contributed to wrong participant


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Currently working on an audit for a 2022 plan year(calendar year) wherein it was recently discovered during our audit that a participant's deferrals were withheld but contributed to an incorrect participant's account due to a SSN error on the deferral upload.  

The participant who did not receive their deferrals was only with the company for a short amount of time (3 months) and is no longer in the Plan.  Additionally, the participant who incorrectly received the funds has since distributed their funds out of the plan due to the fact that the plan is currently in the process of terminating. 

Because of this we presented the client with the options of either: 1) reaching out to the participant who incorrectly received the funds and request that they distribute that money out of their account due to the error, or 2) the trustees of the terminating plan fund the participant themselves in order to make them whole.  Plan management was able to reach out to the individual who incorrectly received the funds and they have agreed to return the funds back.

We are now trying to figure out how this process would work in regards to having the funds distributed from the incorrect individuals new 401k, as well as how to get the funds back to the correct individual through the self correction program, as opposed to the VCP.  Is this possible?

Any help would be greatly appreciated. 

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On 10/4/2023 at 9:24 AM, auditor said:

We are now trying to figure out how this process would work in regards to having the funds distributed from the incorrect individuals new 401k

Just have the plan to which the money was transferred as a direct rollover transfer it back, with allocable earnings or less any allocable loss. I say "just," but of course the trustee-to-trustee communication with the plan to which it was rolled over will need to be detailed. I think it would be appropriate for he distributing plan to issue a corrected  Form 1099-R, but since this appears to have been a direct rollover it probably will not make a difference, nor would it probably require the individual to file an amended 2022 1040, since they would just be changing the amount in the informational rollover box. I doubt the IRS's computers would care.

 

On 10/4/2023 at 9:24 AM, auditor said:

as well as how to get the funds back to the correct individual through the self correction program, as opposed to the VCP

Inform the individual that they have an additional distribution coming from the plan and ask them to complete a new distribution form with respect to the amount. Then distribute it and report on a 2023 1099-R, assuming you get it done in 2023. The amount distributed should be the greater of the amount that would have been distributed to the individual when it should have been, plus the earnings you determine that amount should have received between the time when it should have been distributed and when it is distributed, or the amount transferred back from the plan that erroneously took the amount as a rollover.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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On 10/4/2023 at 7:32 PM, Luke Bailey said:

I think it would be appropriate for he distributing plan to issue a corrected  Form 1099-R, but since this appears to have been a direct rollover it probably will not make a difference, nor would it probably require the individual to file an amended 2022 1040, since they would just be changing the amount in the informational rollover box. I doubt the IRS's computers would care.

Does the IRS match up 1099-Rs with 5498?  Do IRAs issue 5498's for transfers in from, say, 401(k) plans?

if so, I would think then need to amend both the 1099-R and 5498.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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On 10/6/2023 at 11:41 AM, BG5150 said:

Does the IRS match up 1099-Rs with 5498?  Do IRAs issue 5498's for transfers in from, say, 401(k) plans?

if so, I would think then need to amend both the 1099-R and 5498.

BG5150, my comment is based on my guess that they probably don't. But I could be wrong/overly optimistic/overly cynical. And their processes are probably improving rapidly right now (I've seen evidence of that), so who knows. If they don't, maybe they'll start.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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