Non-governmental 457 Plan Rollover

[ratherbereading]

What is the correction if a participant in a non-governmental 457 plan was allowed to roll his money out of the plan to an IRA which is not allowed. TYIA. 

[Carol V. Calhoun]

You treat it like any other overcontribution to an IRA. If possible, it (along with any earnings) should be removed before the filing deadline for the tax return for the year of the rollover. If not, there will be penalties each year until it is corrected. 

[Peter Gulia]

Was the ostensible “rollover” a direct payment to the IRA’s custodian?

Or was the employer’s payment of its obligation paid to the participant, who later transferred to an IRA custodian an amount the individual mistakenly assumed was a rollover?

If a nongovernmental tax-exempt employer’s payment of its obligation happened according to the plan’s provisions, otherwise was proper, had taxes withheld, and was (or timely will be) correctly tax-reported, there might be little about the particular transaction the employer need correct.

If an employer mistakenly treated a payment as a direct rollover and mistakenly omitted to withhold taxes from the deferred wages paid, the employer might pay the taxes and correct the tax-reporting.

An individual might, with one’s lawyer’s or certified public accountant’s advice, evaluate whether to instruct the IRA’s corrective distribution, which would remove the excess-contribution amount with attributable investment gains; what timely steps get a nonapplication of each year’s 6% excise tax; and the tax consequences of a corrective distribution.

As ever, an employer might refresh or intensify its plan-administration procedures and communications.

This is not advice to anyone.

[ratherbereading]

5 minutes ago, Peter Gulia said:

Was the ostensible “rollover” a direct payment to the IRA’s custodian?

Or was the employer’s payment of its obligation paid to the participant, who later transferred to an IRA custodian an amount the individual mistakenly assumed was a rollover?

If a nongovernmental tax-exempt employer’s payment of its obligation happened according to the plan’s provisions, otherwise was proper, had taxes withheld, and was (or timely will be) correctly tax-reported, there might be little about the particular transaction the employer need correct.

If an employer mistakenly treated a payment as a direct rollover and mistakenly omitted to withhold taxes from the deferred wages paid, the employer might pay the taxes and correct the tax-reporting.

An individual might, with one’s lawyer’s or certified public accountant’s advice, evaluate whether to instruct the IRA’s corrective distribution, which would remove the excess-contribution amount with attributable investment gains; what timely steps get a nonapplication of each year’s 6% excise tax; and the tax consequences of a corrective distribution.

As ever, an employer might refresh or intensify its plan-administration procedures and communications.

This is not advice to anyone.

Peter - it was a direct rollover to an IRA from the participant's account. 

[Peter Gulia]

If the employer or its payer mistakenly assumed a direct rollover, corrections might include:

Report the payment of deferred wages on Form W-2, not Form 1099-R.

Calculate all Federal, State, and municipal wage taxes and income taxes that ought to have been withheld from the employer’s payment.

Pay those taxes, with any applicable interest and penalty for late payment.

If some of the error might have resulted from a service provider’s breach of its agreement, get the employer’s lawyer’s advice about rights, conditions, and potential remedies.

Get the employer’s lawyer’s advice about legal and equitable remedies regarding the participant, who might have received more than she was entitled to.

For more information, read 457 Answer Book.

This is not advice to anyone.